2015 Annual Report
Aware, Inc., 40 Middlesex Turnpike, Bedford, MA 01730-1432 USA
T (781) 276-4000 | F (781) 276-4001 | www.aware.com
Cor p orate Infor ma t i on
BOARD OF DIRECTORS
LEGAL COUNSEL
John S. Stafford, Jr.
Chairman
Investor
John S. Stafford, III
Investor
Adrian F. Kruse, C.P.A., J.D.
Audit Partner (retired)
Ernst & Young LLP
Brent P. Johnstone
Managing Director
Quarry Capital Management, LLC
Brian D. Connolly
Portfolio Manager
Millstreet Capital Management, LLC
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer
Aware, Inc.
co-Chief Executive Officer & co-President
Foley Hoag LLP
Boston, MA
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
RSM US LLP
Boston, MA
TRANSFER AGENT
Computershare Investor Services
PO Box 30170
College Station, TX 77842
(781) 575-2879
www.computershare.com/investor
ANNUAL MEETING
Wednesday, 10:00 a.m.
May 25, 2016
Aware, Inc.
Bedford, MA
STOCK LISTING
NASDAQ: AWRE
co-Chief Executive Officer & co-President
Chief Financial Officer
CORPORATE HEADQUARTERS
40 Middlesex Turnpike
Bedford, MA 01730
(781) 276-4000
co-Chief Executive Officer & co-President
CONTACT INFORMATION
Kevin T. Russell
General Counsel
Aware, Inc.
OFFICERS
Richard P. Moberg
Kevin T. Russell
General Counsel
Investor Relations
Aware, Inc.
40 Middlesex Turnpike
Bedford, MA 01730-1432 USA
(781) 276-4000
www.aware.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
Commission file number 000-21129
AWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
04-2911026
40 Middlesex Turnpike, Bedford, Massachusetts 01730
(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer”, “accelerated filer", and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer___ Accelerated Filer_X_ Non-Accelerated Filer___ Smaller Reporting Company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2015 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the closing sale price
as reported on the Nasdaq Global Market, was approximately $58,926,193.
The number of shares outstanding of the registrant’s common stock as of February 5, 2016 was 22,993,139.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the registrant’s Annual
Meeting of Shareholders to be held on May 25, 2016 are incorporated by reference into Part III of this Annual Report on Form 10-K.
AWARE, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business ...................................................................................................................................
Risk Factors .............................................................................................................................
Unresolved Staff Comments ....................................................................................................
Properties .................................................................................................................................
Legal Proceedings ....................................................................................................................
Mine Safety Disclosures ..........................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ..................................................................................................................
Selected Financial Data ............................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ............................................................................................................................
Quantitative and Qualitative Disclosures About Market Risk .................................................
Financial Statements and Supplementary Data ........................................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................................................................................
Controls and Procedures ..........................................................................................................
Other Information ....................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance .......................................................
Executive Compensation ..........................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .....................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .........................
Principal Accountant Fees and Services ..................................................................................
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16
22
22
22
22
23
25
26
39
40
61
61
61
62
62
62
62
62
Item 15.
Exhibits and Financial Statement Schedule .............................................................................
63
PART IV
Signatures ...............................................................................................................................................................
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PART I
FORWARD LOOKING STATEMENTS
Matters discussed in this Annual Report on Form 10-K relating to future events or our future performance, including
any discussion, express or implied, of our anticipated growth, operating results, future earnings per share, market
opportunity, plans and objectives, are “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements are often identified by the words “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,”
“estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ
materially from future results expressed or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set
forth in Item 1A of this Annual Report on Form 10-K and elsewhere in this Report. The forward-looking statements
in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K. We
anticipate that subsequent events and developments will cause our views to change. However, while we may elect to
update these forward-looking statements at some point in the future, we have no current intention of doing so except
to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as
representing our views as of any date subsequent to the date of this Annual Report on Form 10-K.
ITEM 1. BUSINESS
Company Overview
Aware, Inc. (“Aware”, “we”, “us”, “our”, or the “Company”) is a leading provider of software and services to the
biometrics industry. We have been engaged in this business since 1993. Our software products are used in
government and commercial biometrics systems to identify or authenticate people. Principal government
applications of biometrics systems include border control, visitor screening, law enforcement, national defense,
intelligence, secure credentialing, access control, and background checks. Principal commercial applications
include: i) user authentication for login to mobile devices, computers, networks, and software programs; ii) user
authentication for financial transactions and purchases (online and in-person); iii) physical access control to
buildings, and iv) screening and background checks of prospective employees and customers.
Our products provide interoperable, standards-compliant, field-proven biometric functionality and are used to
capture, verify, format, compress and decompress biometric images as well as aggregate, analyze, process, match
and transport those images within biometric systems. We sell a broad range of software products for fingerprint,
facial, and iris modalities. We also offer a variety of software engineering services, including: i) project planning
and management; ii) system design; iii) software design, development, customization, configuration, and testing;
and iv) software integration and installation. We sell our biometrics software products and services globally through
systems integrators and OEMs, and directly to end user customers.
Aware was incorporated in Massachusetts in 1986. We are headquartered at 40 Middlesex Turnpike in Bedford,
Massachusetts, and our telephone number at this address is (781) 276-4000. Our website address is
www.aware.com. The information on our website is not part of this Form 10-K, unless expressly noted. Our stock
is traded on the Nasdaq Global Market under the symbol AWRE.
Industry Background
Biometrics is the measurement of unique, individual physiological characteristics, such as fingerprints, faces, irises,
and voices that can be used to determine or verify an individual’s identity. The biometrics industry offers technology
that digitally captures and encodes biometric characteristics and then compares those characteristics against
previously encoded biometric data to determine or verify an individual’s identity. Biometrics addresses the
limitations inherent in traditional identification and authentication processes, such as paper credentials, passwords,
PIN codes, and magnetic access cards.
The biometrics industry provides solutions for a broad range of government and commercial applications. Principal
government biometrics applications include border control, visitor screening, law enforcement, national defense,
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intelligence, secure credentialing, access control and background checks. Principal commercial applications
include: i) user authentication for login to mobile devices, computers, networks, and software programs; ii) user
authentication for financial transactions and purchases (online and in-person); iii) physical access control to
buildings; and iv) screening and background checks of prospective employees and customers.
We believe that government and commercial entities will continue to adopt and expand the use of biometrics-
enabled solutions to address the limitations and vulnerabilities of traditional identification and authentication
processes. We believe the following factors, among others, will contribute to the growth of biometrics solutions: i)
government-mandated implementation of identification for employees, citizens, and foreign nationals to enhance
national security; ii) military implementations for the identification of terrorists and other hostile persons; iii)
increasing threats to personal security encountered in areas such as transportation; iv) government and commercial
efforts to detect and reduce fraud and cybercrime; v) adoption of biometrics on mobile devices; and vi) the
emergence and adoption of international biometrics standards.
The biometrics industry may be segmented into government and commercial sub-markets. While these markets are
similar in many respects and share similar characteristics and technology, certain aspects of the markets are
different. We believe that this market-based distinction is important to an understanding of Aware’s business as the
vast majority of our revenue is currently derived from government customers.
Government market
Governments throughout the world were early adopters of biometrics technology and continue to be the largest
consumers of the technology. Biometrics technology is used by local, state, and national governments.
At the local and state level, biometrics technology is used in the following applications:
Law enforcement applications that enable officers in the field to correctly identify potential suspects more
reliably and efficiently by submitting biometrics samples to state or federal biometric search services;
Background checks for employment screening;
Drivers’ licenses and identification cards; and
Benefits issuance.
At the national level, biometrics technology is used in the following applications:
Border control
National governments throughout the world have mandated increased spending on security measures,
implemented new regulations and placed greater emphasis on technology to address growing security
concerns. Immigration and border control agencies have taken steps to improve security in response to
heightened concerns over public safety from the threat of terrorism. They use biometrics to help establish
the identity of visitors upon application for a visa or upon arrival at border checkpoints. For example, the
U.S. Office of Biometric Identity Management currently requires foreign visitors entering the United States
to have their ten fingers scanned and a facial photograph taken to determine if they are present on a watch
list. The European Union now mandates that e-passports include fingerprint data in addition to a digital
photograph.
Defense
Within military organizations, key applications of biometrics include: i) background checks of military
personnel and contractors; ii) access control to physical and digital assets; and iii) identification of
unknown and potentially hostile persons by a comparison of their biometric sample against a watch list.
Law enforcement and background checks
Law enforcement agencies perform background checks that use biometrics to help confirm the identity of
individuals who might be present in a biometric database. Background checks might also be provided as a
service to other agencies within the government.
Physical access control
Governments also use biometrics for physical access control by storing biometric data on a digital ID card
and performing a match to verify that the holder of the card is the same person issued the card. Biometrics
are also used for securing access to digital assets, where a biometric match might be required in addition to
a password to gain access to a computer system.
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Government biometrics systems typically operate on client/server-based computer networks. Enrollment
workstations with peripheral capture devices are used to enroll individuals into biometrics systems. Enrollment
involves the capture, processing, and formatting of “biometric samples.” A “biometric sample” is biometric data
which may include: i) images of fingerprints, faces, or irises; ii) digital voice signals; or iii) some other electronic
representation of a biometric characteristic. Examples of capture peripherals include: i) scanners for fingerprint
images, ii) cameras for iris and facial images, iii) handheld devices for mobile capture of fingerprint, iris, and facial
images, or iv) mobile phones for voice signals.
After biometric samples are captured, they are then transported in digital form to centralized matching systems for
identification. Equipment used to perform these functions includes: i) servers to process and transport biometric
samples; and ii) mainframe computers and servers to store and match those samples. In addition, military
applications may employ handheld devices that are capable of capturing samples and matching those samples
against sample databases that reside on the devices.
Due to the nature of government applications, particularly those involving security and defense, government
biometrics systems must be capable of accurately and rapidly searching and matching biometric samples against
large databases of stored samples. The ability to accurately and rapidly match samples against databases of millions
of samples is critical because incorrect or delayed results could have severe adverse consequences. These
requirements are an important distinguishing characteristic of the government market as compared to the
commercial market.
Another characteristic that defines government markets can be seen in the difference between biometric
identification and biometric verification. Biometric identification involves a one-to-many search of thousands or
even millions of records to determine which, if any, record belongs to the individual in question. Government
applications tend to involve biometric identification.
Biometric verification involves a one-to-one biometric comparison that serves to verify that both biometric samples
belong to the same individual. One-to-one matches tend to require less algorithmic accuracy, speed, sensor fidelity,
and computer processing power than “one-to-many” searches performed on large databases of stored biometric
records. Commercial applications tend to involve biometric verification.
Commercial market
Biometrics-based solutions compete with more traditional security methods including keys, cards, personal
identification numbers and security personnel in commercial markets. The adoption of biometrics by leading
vendors of smartphones and other popular consumer products has increased users’ confidence and comfort with
biometrics as a convenient and secure means of authentication. Biometrics solutions are also being considered in
commercial markets as a means of increasing security and reducing fraud as part of “know-your-customer” and
“know-your-employee” efforts. “Know-your-customer” initiatives are designed to verify the identity of customers
before providing products or services. “Know-your-employee” initiatives are designed to verify the identity of
employment candidates upon application for employment.
Notwithstanding these positive developments, commercial markets for biometrics technology are in the process of
developing and evolving. The rate of adoption of biometrics in commercial markets depends upon a number of
factors, including: i) the performance and reliability of biometric solutions; ii) costs involved in adopting and
integrating biometric solutions; iii) public concerns regarding privacy; iv) potential privacy legislation; and v)
standardization efforts by various industry consortia and standards bodies.
Principal biometrics applications in commercial markets involve the authentication and/or identification of
individuals. The types of users that may need to be authenticated or identified in commercial applications include
customers, employees, suppliers, visitors, patients, or other parties wishing to gain access to information, systems,
bank accounts, credit card accounts, events, devices, buildings, or organizations.
Examples of commercial market applications include:
User authentication for login and access to mobile devices, computers, networks, and software programs.
User authentication for financial transactions in the financial services industry.
User authentication for in-person or online purchases in the retail industry.
User authentication for physical access to secured buildings and perimeters.
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User authentication of employees to access private patient information in the healthcare industry.
Identity verification of patients in hospital and surgical settings.
Identity verification of test takers in the educational testing industry.
Identification of prospective customers in the financial services industry.
Identification of candidates for pre-employment screening and background checks.
Identification of undesirable customers in the gaming industry.
We believe that the commercial biometrics market may be further segmented into: i) a consumer mass market
segment; and ii) an enterprise segment. While we believe this delineation serves a useful purpose in describing the
current state of the market, it has its limitations because the two segments overlap.
Consumer mass market segment – This segment is dominated by biometrics-enabled smartphones. Many
smartphones now contain fingerprint sensors and software that can: i) enroll and encode a fingerprint sample; ii)
store the sample in a secure area on the phone; and iii) collect a live fingerprint and match it to the stored fingerprint
sample. Once a biometric match is achieved, the subsequent software functions are analogous to password
authentication. This type of biometric authentication is sometimes referred to as a “one-to-one” match and it
requires a less complex and robust biometric match capability than that used in large client-server based biometrics
systems.
Mobile biometrics authentication applications are largely controlled by smartphone manufacturers as this
functionality is executed by smartphone operating systems and sensor hardware, as opposed to third-party
applications running on the phone. Third party applications on smartphones are currently granted access to biometric
authentication results, but may not necessarily have access to raw biometric samples, hardware, relevant security
functions, or other smartphone capabilities. In contrast, authentication using facial or voice biometric modalities
may be implemented in applications running on the phone, because these applications can make use of the camera
and microphone on the device, which are generally granted broader access to third party developers.
User authentication and payment features enabled by smartphones continue to evolve, and we expect to see further
changes in smartphone security features and functionality.
Enterprise segment – Enterprise biometrics systems are similar to government systems in that they typically operate
in a client/server environment that: i) captures biometrics samples on a client PC; ii) stores those samples in a
database on a server, and then, when queried; iii) matches live samples against stored samples. Mobile devices are
likely to be used in conjunction with enterprise systems as we have seen a desire by customers to use smartphones as
enrollment and access devices.
Opportunities and customer demand are beginning to emerge in the enterprise segment of the commercial market,
but it remains a nascent and evolving market. We are beginning to see three potential types of opportunities,
including:
1. Internal biometrics systems - Some customers want to purchase, install, and maintain custom or off-the shelf
biometrics systems that they will operate. These customers tend to have a critical need or the scale to justify
the cost of acquiring an internal biometrics system. Companies in the financial services industry would be
an example of this class of customer.
2. Biometrics-as-a-service - Biometrics are often provided as services in government settings. For example,
many traditional government biometrics systems can be considered a service provided to other government
entities, such as those offered by the FBI to state and local law enforcement agencies.
Biometrics service providers have begun to offer pay-per-transaction biometrics service offerings in
commercial markets. These services allow organizations to biometrically identify or verify employees,
customers, or other individuals relevant to their business. A pay-per-transaction model may be potentially
more financially attractive for some organizations as compared to the cost of purchasing, installing and
maintaining internal biometrics systems.
3. Biometrically-enabled solutions – There are companies that offer products, systems, or solutions that are not
principally marketed as biometrics products, but include biometrically-enabled components. These vendors
represent an opportunity for core biometrics technology providers, because they generally do not own core
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biometrics technology. Examples of this class of customer would be companies that offer secure
identification/access solutions or biometrics smart cards.
Biometrics industry participants
There are a large number of vendors that serve government and commercial biometrics markets. In order to provide
an understanding of the biometrics industry and our role in it, we have categorized industry participants into
categories that have been defined by us. While we believe our categorization is a reasonable representation of the
industry, we acknowledge that: i) knowledgeable industry participants may define categories differently or classify
vendors differently; and ii) not all companies involved in the industry were included. Accordingly, the classification
that follows represents our perspective on the industry.
We believe that biometrics industry participants may be classified into the following categories:
1) Core technology suppliers
2) System integrators
3) Fully integrated solution suppliers
4) Biometrics-as-a-service providers
5) Vendors of biometrically-enabled solutions
Category descriptions and companies that offer products and services in each category are provided below. It should
be noted that some companies appear in multiple categories.
1) Core technology suppliers
Core biometrics technology includes hardware and software products that enable: i) traditional biometrics
systems used by government and commercial customers; ii) new biometric service offerings; and iii)
biometrically-enabled functionality embedded in other products and solutions. Core biometrics technology
includes three types of products: i) sensor products, ii) biometric capture devices, and iii) software products.
Sensor products
Biometrics sensors are primarily silicon-based devices that capture biometrics samples, such as fingerprints.
Sensors are typically embedded in other devices, such as smartphones or biometric capture devices.
Examples of companies that offer biometric sensor products include: 1) Qualcomm Technologies, Inc.
through its acquisition of UltraScan Corporation; 2) Sonavation, Inc.; 3) Synaptics, Inc.; 4) Fingerprint
Cards AB; 5) Integrated Biometrics, LLC; and 6) Next Biometrics AS.
Biometric capture devices
Biometric capture devices are designed to capture and process biometric samples as their primary function.
These products may be strictly hardware products or hardware products that also incorporate biometrics
software.
Examples of companies that offer biometric capture devices include: 1) Cross Match Technologies, Inc.; 2)
Suprema, Inc.; 3) HID Global Corporation through its 2014 acquisition of Lumidigm, Inc. (“HID”); 4) Iris
ID Systems, Inc (“Iris ID”); 5) Precise Biometrics AB (“Precise Biometrics”); 6) Credence ID, LLC; 7)
SecuGen Corporation; 8) IrisGuard, Inc. (“IrisGuard”); 9) Aurora Biometrics, Inc. (“Aurora Biometrics”);
10) EyeLock LLC (“EyeLock”); and 11) Tascent, Inc. through its 2015 acquisition of Aoptix Technology
Identity Solutions’ business unit.
Software products
Biometrics software products provide functionality that captures, formats, stores, processes, or matches
samples of fingerprints, faces, iris, voices and other modalities. Biometrics software is capable of operating
on variety of equipment platforms, including personal computers, smartphones, biometric capture devices,
hand-held devices, servers, and mainframe computers.
Examples of companies that offer biometrics software products include: 1) Aware, Inc.; 2) MorphoTrak and
MorphoTrust, divisions of the Safran Group Company (“Safran Morpho”); 3) 3M Cogent Inc. (“3M
Cogent”); 4) NEC Corporation (“NEC”); 5) Cognitec Systems GmbH (“Cognitec”); 6) Neurotechnology; 7)
Iritech, Inc. (“Iritech”); 8) Innovatrics s.r.o. (“Innovatrics”); 9) M2Sys Technology (“M2Sys”); 10)
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SpeechPro, Inc.; 11) Agnitio S.L.; 12) Precise Biometrics; 13) Facebanx, a subsidiary of OhHi, Ltd; 14)
VoiceTrust GmbH.; 15) Eyelock; 16) BIO-key International, Inc.; 17) VoiceVault Inc.; 18) EyeVerify, Inc.;
19) Iris ID; 20) IrisGuard; 21) Aurora Biometrics; 22) NexID Biometrics LLC.; and 23) Daon Trusted
Identity Services (“Daon”).
2) System integrators
System integrators purchase hardware and software technology from core biometrics technology vendors and
incorporate those components into customized biometrics systems that they deliver to end-user customers.
Historically those end-user customers have been governments, but in recent years system integrators have
begun to serve commercial enterprise customers as well. System integrators include large multinationals with a
broad range of expertise and the capacity to execute very large projects, as well as smaller system integrators
that have more focused expertise on a particular market sector, technology, or geography. Some system
integrators have developed their own biometric technologies that they deliver as part of their solutions.
Examples of companies that offer systems integration services include: 1) Northrop Grumman Corporation; 2)
Lockheed Martin Corporation; 3) Science Applications International Corporation; 4) Hewlett-Packard
Enterprise Services; 5) International Business Machines Corporation; 6) Fujitsu Limited; 7) Accenture plc; 8)
Unisys Corporation; 9) Leidos, Inc.; and 10) ManTech International Corporation.
3) Fully integrated solutions suppliers
Fully integrated solutions suppliers are similar to systems integrators in that they deliver customized biometrics
systems to government and commercial enterprise end-user customers. They differ from system integrators in
that they use core hardware and software technologies that they developed in-house or acquired from others.
Vendors in this category may purchase some third party software, but we believe such purchases represent a
minor component of the overall systems they deliver.
There are three large global suppliers of fully integrated solutions, including: 1) Safran Morpho; 2) 3M Cogent;
and iii) NEC. We believe these companies supply a large percentage of the biometric systems that are delivered
to government customers around the world.
In addition to these three large suppliers, we would categorize Dermalog Identification Systems GmbH as a
fully integrated solution provider, but one that operates on a smaller scale. Aware also has a product portfolio
and services capability that enables us to deliver fully integrated solutions. We have acted in this capacity on a
limited basis in the past and an element of our strategy is to grow this part of our business in the future.
4) Biometrics-as-a-service providers
Biometrics service providers have begun to offer a pay-per-transaction biometrics service offering. This service
allows organizations to biometrically identify or verify employees, customers, or other individuals relevant to
their business. A pay-per-transaction model may be potentially more financially attractive for some
organizations as compared to the cost of purchasing, installing and maintaining internal biometrics systems.
Examples of companies offering biometrics services include: 1) Certibio Identidade Biometrica, a wholly-
owned subsidiary of Certisign Certificadora Digital S.A. (“Certisign”); 2) Safran Morpho; and 3) Daon.
5) Vendors of biometrically-enabled solutions
Vendors of biometrically-enabled solutions provide products that are not principally marketed as biometrics
products, but include biometric functionality. Biometrics capability is a feature, but not the chief function of
these products. Such vendors represent a potential opportunity for core biometrics technology providers as some
of them do not own core biometrics technology.
Examples of companies that offer biometrically-enabled smartphone products include: 1) Apple, Inc.; 2)
Samsung Electronics Co., Ltd.; and 3) Google, Inc.
Examples of companies that offer secure identification/access solutions that incorporate biometrically-enabled
components include: 1) Gemalto NV; 2) HID; 3) Entrust Datacard Corporation; and 4) Oberthur Technologies.
Examples of companies that offer physical access control solutions that may incorporate biometrics include: 1)
Honeywell International, Inc.; 2) Tyco International Ltd.; 3) Lenel Systems International Inc.; and 4) Stanley
Security Limited.
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Products and Services
Software products
We sell a broad range of biometrics software products for fingerprint, facial, and iris modalities. Our software
products enable important functions in biometrics systems, including:
Integration of peripheral biometric capture devices.
1. Enrollment, analysis, and processing of biometric images and data on workstations or mobile devices.
2.
3. Centralized workflow, transaction processing, and subsystem integration.
4. Matching of biometric samples against biometric databases to authenticate or verify identities; and
5. Analysis and processing of text-based identity data.
Our biometrics software products range from discrete software blocks that customers can use to develop their own
solutions to more complete applications that customers can use to reduce or eliminate their development times. We
classify our biometrics software products into five product groups, including, i) Software Development Kits; ii)
Enrollment Controls and Applets; iii) Applications; iv) Middleware/Workflow Server; and v) Cluster Computing
Platform. Each of these product groups is described below.
1) Software Development Kits. Our software development kits or (“SDKs”) consist of: i) multiple software
libraries; ii) sample applications that show customers how to use the libraries; and iii) documentation.
Customers use our SDKs to design and develop biometrics applications. Our SDK products may be categorized
into three groups: i) Enrollment; ii) Search and Matching; and iii) Identity Data Management and Analytics.
These products are described below.
SDK Group 1: Enrollment SDKs. Our suite of enrollment SDKs performs a variety of functions that are critical
to biometric enrollment, including image capture, image quality assurance, image formatting, and image
compression. Our enrollment SDK products include:
Hardware abstraction, autocapture, and quality assurance products, including: i) LiveScan API; ii)
PreFaceTM; iii) IrisCheckTM; and iv) SequenceCheckTM.
Biometric data formatting, validation and reading products, including: i) NISTPack; ii) ICAOPack; and iii)
PIVPackTM.
Fingerprint, facial, and iris image compression and decompression products, including: i) Aware
WSQ1000; and ii) Aware JPEG2000.
Fingerprint card scanning and printing products, including: i) AccuScanTM; and ii) AccuPrintTM.
Mobile products for smartphones and tablets, including: i) NISTPack Mobile; ii) WSQ1000 Mobile; iii)
ICAOPack Mobile; iv) PIVPackTM Mobile; v) AwareXMTM Mobile, and vi) PreFaceTM Mobile.
Application specific bundles, including CaptureSuiteTM which is used for the development of applications
for the capture of live scan or card scan fingerprint images.
SDK Group 2: Biometric Search and Match SDKs. Our Nexa™ line of biometric search and matching products
for fingerprint, face and iris includes our Nexa|Fingerprint™, Nexa|Face™, and Nexa|Iris™ products. These
products contain algorithms that convert images into biometric templates. A biometric template is a
mathematical representation of a biometric image. Templates can then be compared to templates stored in
databases to find matches. Our Nexa products also compare and match templates.
Each Nexa SDK can be deployed on a workstation or a server, either as a standalone biometric search/match
API, or in combination with our other SDKs, applications, and BioSP product. Our SequenceCheck, PreFace,
and IrisCheck SDKs may be used in concert with Nexa libraries to perform optional quality assurance and
preprocessing for enhanced fingerprint, face, and iris search and match functionality.
Our biometric search and match SDKs also include our AwareXM™ product which extracts and matches
MINEX-compliant fingerprint templates.
SDK Group 3: Text Search and Identity Analytics SDKs. We have two products in this SDK group, including:
i) Inquire|Search™; and ii) Inquire|Resolve™. These products contain algorithms for text-based filtering,
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searching, matching, and linking functions to discover useful information in identity data. Product capabilities
include: i) integrating and resolving identity-centric data across multiple data stores; ii) assessing data quality
and detecting anomalies; iii) performing link analysis and relationship discovery; and iv) performing text-based
pre- and post-filtering of biometric searches.
2) Enrollment Controls and Applets. This group of products consists of our BioComponentsTM line of products.
Our BioComponents products allow customers to develop biometric enrollment applications more quickly than
if they purchased our SDKs. Each product in the group includes a user interface and one or more software
libraries that perform a discrete set of functions, such as automated image capture, quality assurance, and
capture hardware integration. BioComponents comprise modular, independent, self-contained software
components that can operate either independently or in concert with one another. Specific BioComponents
products and the functions they perform are:
BiographicComponent enables highly configurable data entry of biographic and textual information.
FingerprintComponent is used to capture, verify image quality, and compress fingerprint images.
FaceComponent is used to capture, verify image quality, and manipulate facial images.
IrisComponent is used to capture, segment, and verify image quality of iris images.
TravelDocComponent is used to authenticate travel documents, such as passports and driver’s licenses.
ScanningComponent is used to scan forms such as inked fingerprint cards.
PrintingComponent is used for printing FBI-quality fingerprint images on cards and forms.
SignatureComponent is used to collect handwritten signature images from an electronic signature pad.
PackagingComponent allows access to the data sets from the other components.
3) Applications. Our products in this category combine user interfaces with multiple Aware software libraries
and/or BioComponents to create more complete applications that operate on client workstations or mobile
devices. Our application products and the functions they perform are:
Universal Registration Client (“URCTM”). URC is a configurable Windows-based application that
performs a variety of biometric data capture, analysis, matching, formatting, and hardware abstraction
functions.
URC Mobile. URC Mobile is a software application for performing biometric enrollment,
identification, and screening on mobile biometric devices, such as those used by military personnel in
the field.
FormScannerSE and FormScannerMB. These are two independent applications for scanning and
processing of inked fingerprint cards.
FormScannerSWFT. This product is a version of FormScannerSE that is preconfigured for use in
compliance with the “Secure Web Fingerprint Transmission” program of the U.S. Department of
Defense.
Forensic Workbench. Forensic Workbench is a software application for the categorization, processing,
and standards-compliant formatting of biometric images and demographic data.
Sequence Workbench. Sequence Workbench is a software application for the detection and assisted
repair of fingerprint records containing sequence errors.
CrosslinkWorkbench. CrosslinkWorkbench is an application that utilizes several Aware SDKs for
assisting with identifying and repairing of crosslink errors in ANSI/NIST ITL transactions. Crosslinks
are biometric records that erroneously contain data from different individuals.
FaceWorkbench. FaceWorkbench provides a user interface and systematic workflow to enable an
analyst to analyze and process the candidates returned from a biometric face search.
WebEnroll. WebEnroll provides a reference application that uses BioComponents for browser-based
enrollment of biographic data, fingerprints, facial images, and iris images.
4) Middleware/Workflow Server. Our Biometric Services Platform, or BioSPTM product, is a service-oriented
application used to enable workflow, subsystem integration, and biometric data processing and management.
BioSP is suited for applications that require the collection of biometrics throughout a distributed network.
BioSP is designed to be modular, programmable, scalable, and secure. It is used to manage transaction
workflow, including messaging, submissions, responses, and logging.
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Key BioSP features and functionality include:
automated biometric image and data analysis, processing, formatting, quality assurance, and reporting.
web services in support of a scalable, secure, service-oriented architecture.
integration of biometric functions with other enterprise systems such as identity management, access
management, card management, and AFIS/ABIS.
One-to-one and one-to-many biometric matching for verification, identification, and duplicate
checking.
centralized system administration and user management.
advanced reporting capabilities for fast troubleshooting of biometric capture problems.
centralized configuration, distribution, and management of enrollment client software.
support for fingerprint, facial, iris, and palm modalities.
5) Cluster Computing Platform. In 2015, we introduced our AstraTM cluster computing platform. Astra is a
software platform that performs large-scale identity-related security tasks, including: i) biometric search and
match; ii) biometric authentication; and iii) identity analytics. Astra distributes computing operations across a
cluster of computing nodes, enabling rapid search of very large biometric databases and execution of high
volumes of biometric authentications. Astra is designed to be algorithm-independent, but also works seamlessly
with other Aware products, including our Nexa, Inquire, and BioSP products.
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. Our JPEG2000 product is used to compress, store, and display
images. Those images are typically medical images.
Software maintenance
We also sell software maintenance contracts to many of our customers who purchase software licenses. These
contracts typically have a one year term during which customers have the right to receive technical support and
software updates, if and when they become available. Customers tend to renew maintenance contracts during the
period of time that our software is being used in their biometrics systems.
Services
We offer a variety of software engineering services, including: i) project planning and management; ii) system
design; iii) software design, development, customization, configuration, and testing; and iv) software integration and
installation. Services are typically, but not always, sold in conjunction with software licenses.
Service engagement deliverables may include: i) custom-designed software products; ii) custom-configured versions
of existing software products; iii) one or more subsystems comprised of software products that are integrated within
a larger system; or iv) complete software solutions. In some cases, the software resulting from service engagements
may form the basis for new or improved Aware software products.
Our customers for services include: i) government agencies; ii) large multinational systems integrators; iii) smaller
systems integrators with a particular market, technology or geographic focus; and iv) commercial providers of
products, solutions, and services. We provide services directly to end-users or indirectly to end-users through
systems integrators. When we provide services to systems integrators, they are often engaged with the end-user as a
prime contractor and are responsible for delivery of a complete solution, in which case we typically serve as a
subcontractor assigned a subset of the total scope of work.
The scope of our services projects varies. A small project might involve configuration and testing of a single
software product, taking a small team one month or less. A large project might involve delivery of a more complex
solution comprised of multiple products and subsystems, requiring a larger team to conduct project management,
system design, software customization and integration, and taking up to one year or more. Some projects are
followed by subsequent projects that serve to change or extend the features and functionality of the initial system.
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Hardware products
We developed a biometrics software system for a U.S. government customer under a Small Business Innovation
Research (“SBIR”) contract that began in 2008 and ended in early 2013. When the software development project
ended in early 2013, we entered into a separate contract to supply hardware products incorporating the developed
software. Hardware products sold to this customer integrate the developed software with: i) hardware purchased
from third parties; ii) software purchased from third parties; and iii) some of our biometrics software products.
While other customers could theoretically purchase the hardware products developed for this customer, we believe
that it is unlikely that they will do so, because of the highly customized nature of the products.
Sales and Marketing
As of December 31, 2015, we had a total of 11 employees in our sales and marketing organization. In addition to our
employee sales staff, we also engage third party sales agents to sell our products and services in foreign countries.
We sell our products and services through three principal channels of distribution:
i) Systems integrator channel – we sell to systems integrators that incorporate our software products into
biometrics systems that are delivered primarily to government end users.
ii) OEM channel – we sell to hardware and software solution providers that incorporate our software products
into their products.
iii) Direct channel – we also sell directly to government, and, to a lesser degree, to commercial customers.
All of our revenue in 2015, 2014, and 2013 was derived from unaffiliated customers. Revenue from Certisign
Certificadora Digital S.A. represented 10%, 2%, and 0% of revenue during 2015, 2014, and 2013, respectively.
Revenue from the U.S. Navy represented 9%, 24%, and 21% of total revenue during 2015, 2014, and 2013,
respectively. Revenue from the U.S. Marine Corps represented 3%, 10%, and 3% of total revenue during 2015,
2014, and 2013, respectively. No other customer represented 10% or more of total revenue in any of those years.
Competition
The markets for our products and services are competitive and uncertain. We compete against: i) other companies
that provide biometric software solutions; and ii) fully diversified companies that provide biometric software
solutions and also act as systems integrators. We can give no assurance that: i) our products and services will
succeed in the market; ii) that we will be able to compete effectively; or iii) that competitive pressures will not
seriously harm our business.
Many of our competitors are larger than us and have significantly greater financial, technological, marketing and
personnel resources than we do. At the other end of the competitive spectrum, we have seen increasing competition
from smaller biometrics companies in foreign countries. These smaller foreign competitors have demonstrated a
willingness to sell their biometrics software products at low prices.
We can give no assurance that our customers will continue to purchase products from us or that we will be able to
compete effectively in obtaining new customers to maintain or grow our business.
Aware’s Strategy
Our strategy is to capitalize on our strong brand and reputation to sell biometrics software products and services into
government and commercial markets. We intend to offer a broad portfolio of high quality products that are coupled
with expert technical support and services. We expect to continue to employ a three-pronged distribution strategy
using systems integrators, OEMs, and direct sales.
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Our strategy for growing our biometrics business may include one or more of the following elements:
i)
Product strategy – Our product strategy is to offer more complete biometrics solutions. We believe this
strategy will allow us to us to sell more software and services into biometrics projects. We recognized the
need to make this transition several years ago and developed new products to enable this strategy.
Our strategy to offer complete solutions involves:
Product line expansion - Our aim is to expand our product portfolio by adding new products and
increasing the functionality of existing products using our internal engineering teams. This means
we may add resources to our engineering staff. To the extent we are unable to develop critical new
technologies internally, we may purchase or license such technologies from third parties.
Alternatively, we may also acquire biometrics companies provided we believe the acquisition cost is
reasonable relative to the estimated future revenue and profits the acquired company may produce.
Engineering services – We believe that services are an important element of our strategy to sell
complete solutions. We intend to have adequate engineering resources on hand to ensure that we can
staff projects with the technical expertise we need to win new projects.
ii) Market strategy – Our market strategy is to continue to focus on our legacy government biometrics
market and expand into new commercial biometrics markets. Historically our revenue has been primarily
derived from the government biometrics market and we intend to continue our focus there.
We believe the evolution of commercial markets over the past few years may present opportunities for
us. While it is unlikely that we will pursue opportunities in the consumer mass market segment of the
market, we are beginning to see opportunities in the enterprise segment. The requirements of the
enterprise segment appear to be well suited to our technology, products, and expertise.
iii)
Sales strategy – While the United States remains a large market, we believe there are attractive growth
opportunities in international markets. We intend to continue our focus on international markets and
pursue opportunities there through additions to our sales staff, as well as through the use of third party
sales agents.
As we attempt to grow our biometrics business, we may make investments in growth initiatives, such as those
described above, that may cause our profitability to decline in the near term.
Our strategy does not include growing biometrics hardware revenue. Hardware revenue in 2015, 2014 and 2013
represents an accommodation to an important customer. Other than a $0.3 million order in backlog as of December
31, 2015, it is unlikely that we will have meaningful sales of hardware in future periods as this customer appears to
have completed the bulk of its purchasing.
Backlog
We had $6.6 million of backlog on December 31, 2015. We define backlog as revenue items in deferred revenue and
undelivered orders in our backlog report. Total backlog of $6.6 million included: i) $3.7 million of software licenses
that will be recognized over the first ten months of 2016; ii) $2.3 million of software maintenance revenue of which
approximately $2.2 million will be recognized during 2016; iii) $0.3 million of services that we anticipate will be
delivered in the first quarter of 2016; and iv) $0.3 million of hardware that we anticipate will be delivered in the first
quarter of 2016.
Research and Development
Our research and development activities are focused on enhancing our existing products and developing new
products. Our engineering organization is based in Bedford, Massachusetts. As of December 31, 2015, we had an
engineering staff of 47 employees, representing 68% of our total employee staff.
During the years ended December 31, 2015, 2014, and 2013, research and development expenses totaled $5.8
million, $5.5 million, and $4.1 million, respectively. We expect that we will continue to invest substantial funds in
research and development activities.
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Patents and Intellectual Property
We rely on a combination of nondisclosure agreements and other contractual provisions, as well as patent,
trademark, trade secret and copyright law to protect our proprietary rights. We have an active program to protect
our proprietary technology through the filing of patents. As of December 31, 2015, we had approximately 38 U.S.
and foreign patents and approximately 31 pending patent applications. Our patents and patent applications pertain
primarily to biometrics and imaging compression.
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 and non-competition agreement. Although we intend to protect our rights
vigorously, we cannot assure you 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. From time to time, we 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.
Manufacturing & Systems Integration
We do not design or manufacture hardware products, however we provide systems integration services for one U.S.
government customer. Our systems integration activities include: i) procuring hardware and software components
from third party suppliers; ii) installing Aware and third party software on the purchased hardware; and iii) testing
products for quality assurance prior to shipment.
We rely on single source suppliers for certain critical hardware and software components. Our dependence on single
source suppliers involves several risks, including limited control over availability, quality, and delivery schedules.
Any delays in delivery or shortages of such components could cause delays in the shipment of our products, which
could harm our business.
Employees
At December 31, 2015, we employed 69 people, including 47 in engineering, 11 in sales and marketing, and 11 in
finance and administration. Of these employees, 66 were based in Massachusetts. None of our employees are
represented by a labor union. We consider our employee relations to be good.
We believe that our future success will depend in large part on the service of our technical, sales, marketing and
senior management personnel and upon our ability to retain highly qualified technical, sales and marketing and
managerial personnel. We cannot assure you that we will be able to retain our key managers and employees or that
we will be able to attract and retain additional highly qualified personnel in the future.
DSL Discontinued Operations
From the early 1990s until 2013, we were engaged in the Digital Subscriber Line (“DSL”) industry. We sold the
assets of our DSL semiconductor intellectual property business in 2009, and shut down our DSL service assurance
hardware and software businesses in 2012 and 2013, respectively. Results from the shutdown of our DSL service
assurance software businesses were reported in discontinued operations in the year ended December 31, 2013.
Notwithstanding the sale of DSL semiconductor intellectual property assets in 2009, we continue to receive royalty
payments from two customers. DSL royalties are reported in continuing operations in accordance with ASC 205-20,
Reporting Discontinued Operations, because we have continuing cash flows from this business. DSL royalties have
been declining in recent years and represented approximately 2% of total revenue in 2015. We expect royalties will
continue to decline in future periods.
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Segment Information; Financial Information About Geographic Areas
We organize ourselves into a single segment that reports to the chief operating decision makers. Summaries of
revenue by geographic regions and revenue by product group are set forth in Note 9 to our consolidated financial
statements included elsewhere in this Annual Report.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended, are made available free of charge on or through our website at www.aware.com as soon as
reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission
(the SEC). The SEC also maintains a website, www.sec.gov, that contains reports and other information regarding
issuers that file electronically with the SEC. Such reports, proxy statements, and other information may also be
obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, DC, 20549 or by
calling the SEC at 1-800-SEC-0330.
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.
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ITEM 1A. RISK 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 net income in any single quarter and
the timing of the receipt of those orders is difficult to predict. The failure to close an order or the deferral or
cancellation of an order can result in revenue and net income shortfalls for that quarter. We base our current and
future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent
fixed. As a result, we may not be able to sufficiently reduce our costs in any quarter to adequately compensate for an
unexpected near-term shortfall in revenues, and even a small shortfall could disproportionately and adversely affect
financial results for that quarter.
Our financial results may be negatively affected by a number of factors, including the following:
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the 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;
the loss of a key customer or one of its key customers;
new competitors, or the introduction of enhanced solutions from new or existing competitors;
competitive pressures on selling prices;
cancellations, delays 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.
We derive a significant portion of our revenue directly or indirectly from government customers, and our
business may be adversely affected by changes in the contracting or fiscal policies of those governmental entities.
We derive a significant portion of our revenue directly or indirectly from federal, international, state and local
governments. We believe that the success and growth of our business will continue to depend on government
customers purchasing our products and services either directly through us or indirectly through our channel partners.
Changes in government contracting policies or government budgetary constraints may adversely affect our financial
performance. Among the factors that could adversely affect our business are:
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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;
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.
These and other factors could cause government customers or our channel partners to reduce purchases of products
and services from us which would have a material adverse effect on our business, financial condition and operating
results.
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A significant commercial market for biometrics technology may not develop, and, even if it does, there can be no
assurance our biometrics technology will be successful.
A component of our strategy to grow revenue includes expansion into commercial markets. To date, biometrics
technology has received only limited acceptance in such markets. Although the recent appearance of biometric
readers on popular consumer products, such as smartphones, has increased interest in biometrics as a means of
authenticating and/or identifying individuals, commercial markets for biometrics technology are in the process of
developing and evolving. Biometrics-based solutions compete with more traditional security methods including
keys, cards, personal identification numbers and security personnel. Acceptance of biometrics as an alternative to
such traditional methods depends upon a number of factors including: i) the performance and reliability of biometric
solutions; ii) costs involved in adopting and integrating biometric solutions; iii) public concerns regarding privacy;
and iv) potential privacy legislation.
For these reasons, we are uncertain whether there will be significant demand for biometrics technology from
commercial markets. Moreover, even if there is significant demand, there can be no assurance that our biometrics
products will achieve market acceptance.
We derive a significant portion of our revenue from third party channel partners.
Our future results depend upon the continued successful distribution of our products through a channel of systems
integrators and OEM partners. Systems integrators, including value added resellers, use our software products as a
component of the biometrics systems they deliver to their customers. OEMs embed our software products in their
technology devices or software products. These channel partners typically sell their products and services to
government customers.
Our failure to effectively manage our relationships with these third parties could impair the success of our sales,
marketing and support activities. Moreover, the activities of these third parties are not within our direct control. The
occurrence of any of the following events could have a material adverse effect on our business, financial condition
and operating results:
the failure of our partners to win government awards in which our products are used;
a reduction in sales efforts by our partners;
a reduction in technical capabilities or financial viability of our partners;
a misalignment of interest between us and them;
any adverse effect on a partner’s business related to competition, pricing and other factors.
the termination of our relationship with a major systems integrator or OEM; or
If the biometrics market does not experience significant growth or if our products do not achieve broad
acceptance both domestically and internationally, we may not be able to grow our business.
Our revenues are derived primarily from sales of biometrics products and services. We cannot accurately predict the
future growth rate or the size of the biometrics market. The expansion of the biometrics market and the market for
our biometrics products and services depend on a number of factors, such as:
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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 information;
customers’ satisfaction with biometrics solutions; and
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• marketing efforts and publicity regarding biometrics solutions.
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Even if biometrics solutions gain wide market acceptance, our solutions may not adequately address market
requirements and may not continue to gain market acceptance. If biometrics solutions generally or our solutions
specifically do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth and
our revenues and results of operations would be adversely affected.
Hardware revenue is likely to decline in future periods.
In the years ended December 31, 2015, 2014 and 2013, we had hardware revenue of $1.1 million, $4.9 million and
$3.2 million respectively. Gross profit on hardware revenue was $0.4 million, $1.4 million and $0.8 million in
2015, 2014 and 2013, respectively.
Hardware revenue consisted of sales of biometrics equipment to a single U.S. government customer. While we are
unable to predict future hardware sales with any degree of certainty, future orders from this customer may be
minimal as we believe that the bulk of its purchases may have already occurred. We have $0.3 million of hardware
orders in backlog as of December 31, 2015. If we are unable to replace the lost gross profit on hardware revenue
with sales of other products and services in future periods, our operating results will be adversely affected.
We face intense competition from other biometrics solutions providers.
A significant number of established companies have developed or are developing and marketing software and
hardware for biometrics products and applications that currently compete with or will compete directly with our
offerings. We believe that additional competitors will enter the biometrics market and become significant long-term
competitors, and that, as a result, competition will increase. Companies competing with us may introduce solutions
that are competitively priced, have increased performance or functionality or incorporate technological advances we
have not yet developed or implemented. Our current principal competitors include:
• Diversified technology providers that offer integrated biometrics solutions to governments, law enforcement
agencies and other organizations. This group of competitors includes companies such as Safran Morpho,
3M/Cogent, and NEC.
• Component providers that offer biometrics software and hardware components for fingerprint, facial, and
This group of competitors includes companies such as Cognitec,
iris biometric identification.
Neurotechnology, Iritech, Innovatrics, and M2Sys.
We expect competition to intensify in the near term in the biometrics market. Many current and potential
competitors have substantially greater financial, marketing, and research resources than we have. Moreover, low
cost foreign competitors from third world and other countries have demonstrated a willingness to sell their products
at significantly reduced prices. To compete effectively in this environment, we must continually develop and market
new and enhanced solutions and technologies at competitive prices and must have the resources available to invest
in significant research and development activities. Our failure to compete successfully could cause our revenues and
market share to decline.
The biometrics industry is characterized by rapid technological change and evolving industry standards, which
could render our existing products obsolete.
Our future success will depend upon our ability to develop and introduce a variety of new capabilities and
enhancements to our existing products in order to address the changing and sophisticated needs of the marketplace.
Frequently, technical development programs in the biometrics industry require assessments to be made of the future
direction of technology, which is inherently difficult to predict. Delays in introducing new products and
enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products
or enhancements at competitive prices may cause customers to forego purchases of our products and purchase our
competitors’ products. We may not have adequate resources available to us or may not adequately keep pace with
appropriate requirements in order to effectively compete in the marketplace.
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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.
Complex software products such as ours may contain errors, defects or bugs. Defects in the products that we
develop and sell to our customers could require expensive corrections and result in delayed or lost revenue, adverse
customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with
any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be
time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm
our reputation, financial results and competitive position.
Our business may be adversely affected by our use of open source software.
The software industry is making increasing use of open source software in the development of products. We also
license and integrate certain open source software components from third parties into our software. Open source
software license agreements may require that the software code in these components or the software into which they
are integrated be freely accessible under open source terms. Many features we may wish to add to our products in
the future may be available as open source software and our development team may wish to make use of this
software to reduce development costs and speed up the development process. While we carefully monitor the use of
all open source software and try to ensure that no open source software is used in such a way as to require us to
disclose the source code to the related product, such use could inadvertently occur. If we were required to make our
software freely available, our business could be seriously harmed.
Our intellectual property is subject to limited protection.
Because we are a technology provider, our ability to protect our intellectual property and to operate without
infringing the intellectual property rights of others is critical to our success. We regard our technology as
proprietary. We rely on a combination of patent, trade secret, copyright, and trademark law as well as
confidentiality agreements to protect our proprietary technology, and cannot assure you that we will be able to
enforce the patents we own against third parties. Despite our efforts, these measures can only provide limited
protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise
obtain and use our intellectual property. If we fail to protect our intellectual property rights adequately, our
competitors may gain access to our technology, and our business would thus be harmed.
In the future, we may be involved in legal action to enforce our intellectual property rights relating to our patents,
copyrights or trade secrets. Any such litigation could be costly and time-consuming for us, even if we were to
prevail. Moreover, even if we are successful in protecting our proprietary information, our competitors may
independently develop technologies substantially equivalent or superior to our technology. Accordingly, despite our
efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property
or otherwise gaining access to our technology. The misappropriation of our technology or the development of
competitive technology could seriously harm our business.
We may be sued by third parties for alleged infringement of their proprietary rights.
Our technology and products may infringe the intellectual property rights of others. A large and increasing number
of participants in the technology industry, including companies known as non-practicing entities, have applied for or
obtained patents. Some of these patent holders have demonstrated a readiness to commence litigation based on
allegations of patent infringement. Third parties have asserted against us in the past and may assert against us in the
future patent, copyright and other intellectual property rights to technologies that are important to our business.
Intellectual property rights can be uncertain and involve complex legal and factual questions. Moreover, intellectual
property claims, with or without merit, can be time-consuming and expensive to litigate or settle, and could divert
management attention away from the execution of our business plan. If we were found to have infringed the
proprietary rights of others, we could be subject to substantial damages or an injunction preventing us from
conducting our business.
19
If we are unable to attract and retain key personnel, our business could be harmed.
If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and
could experience a loss in productivity while any successor obtains the necessary training and experience. Our
employment relationships are at-will and we have had key employees leave in the past. We cannot assure you that
one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified
personnel, including software engineers and sales personnel, but may not be able to attract, assimilate or retain
qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm
our business.
We rely on single sources of supply for certain components used in our hardware products.
We commenced sales of biometrics hardware products to a U.S. government customer in 2013. Hardware products
sold to this customer integrate hardware and software purchased from third parties. We rely on single source
suppliers for certain critical hardware and software components. Our dependence on single source suppliers involves
several risks, including limited control over availability, quality, and delivery schedules. Any delays in delivery or
shortages of such components could cause delays in the shipment of our products, which could harm our business.
Our business may be affected by government regulations.
Extensive regulation by federal, state, and foreign regulatory agencies could adversely affect us in ways that are
difficult for us to predict. In addition, our business may also be adversely affected by: i) the imposition of tariffs,
duties and other import restrictions on goods and services we purchase from non-domestic suppliers; or ii) by the
imposition of export restrictions on products we sell internationally. Changes in current or future laws or
regulations, in the United States or elsewhere, could seriously harm our business.
Adverse economic conditions could harm our business.
Unfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, 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; and
risks to our liquidity, including the possibility that we might not have access to our cash when needed.
We are unable to predict the timing, duration, and severity of any such adverse economic conditions in the U.S. and
other countries, but the longer the duration, the greater the risks we face in operating our business.
We may make acquisitions of companies.
We may make acquisitions of companies that offer complementary products, services and technologies. Any
acquisitions we may complete involve a number of risks, including the risks of assimilating the operations and
personnel of acquired companies, realizing the value of the acquired assets relative to the price paid, distraction of
management from our ongoing businesses and potential product disruptions associated with the sale of the acquired
company’s products. These factors could have a material adverse effect on our business, financial condition,
operating results and cash flows. The consideration we pay for any future acquisitions could include our stock. As a
result, future acquisitions could cause dilution to existing shareholders and to earnings per share.
We may have additional tax liabilities.
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
20
Revenue Service (“IRS”) and state tax authorities. There can be no assurance as to the outcome of these
examinations. If the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued,
our operating results, cash flows, and financial condition could be adversely affected.
The market price of our common stock has been and may continue to be subject to wide fluctuations, and this
may make it difficult for shareholders to resell the common stock when they want or at prices they find attractive.
The market price of our common stock, like that of other technology companies, is volatile and is subject to wide
fluctuations in response to a variety of factors, including:
quarterly variations in operating results;
announcements of technological innovations or new products by us or our competitors,
changes in customer relationships, such as the loss of a key customer;
recruitment or departure of key personnel;
corporate actions we may initiate, such as acquisitions, stock sales or repurchases, dividend declarations, or
corporate reorganizations; and
other events or factors.
Our stock price may also be affected by broader market trends unrelated to our performance. As a result, purchasers
of our common stock may be unable at any given time to sell their shares at or above the price they paid for them.
Moreover, companies that have experienced volatility in the market price of their stock often are subject to securities
class action litigation. If we were the subject of such litigation, it could result in substantial costs and divert
management's attention and resources.
If we are unable to maintain effective internal controls over financial reporting, investors could lose confidence
in the reliability of our financial statements, which could result in a decline in the price of our common stock.
As a public company, we are required to enhance and test our financial, internal and management control systems to
meet obligations imposed by the Sarbanes-Oxley Act of 2002. Consistent with the Sarbanes-Oxley Act and the rules
and regulations of the SEC, management's assessment of our internal controls over financial reporting and the audit
opinion of our independent registered accounting firm as to the effectiveness of our controls is required in
connection with our filing of our Annual Report on Form 10-K. If we are unable to identify, implement and
conclude that we have effective internal controls over financial reporting or if our independent auditors are unable to
conclude that our internal controls over financial reporting are effective, investors could lose confidence in the
reliability of our financial statements, which could result in a decrease in the value of our common stock. Our
assessment of our internal controls over financial reporting may also uncover weaknesses or other issues with these
controls that could also result in adverse investor reaction.
We must make judgments in the process of preparing our financial statements.
We prepare our financial statements in accordance with generally accepted accounting principles and certain critical
accounting policies that are relevant to our business. The application of these principles and policies requires us to
make significant judgments and estimates. In the event that our judgments and estimates differ from actual results,
we may have to change them, which could materially affect our financial position and results of operations.
Moreover, accounting standards have been subject to rapid change and evolving interpretations by accounting
standards setting organizations over the past few years. The implementation of new accounting standards requires
us to interpret and apply them appropriately. If our current interpretations or applications are later found to be
incorrect, we may have to restate our financial statements and the price of our stock could decline.
21
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We believe that our existing facilities are adequate for our current needs and that additional space sufficient to meet
our needs for the foreseeable future will be available on reasonable terms. We currently occupy approximately
72,000 square feet of office space in Bedford, Massachusetts, which serves as our headquarters. This site is used for
our research and development, sales and marketing, and administrative activities. We own this facility.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our business. We are not party to any
lawsuit or proceeding that, in our opinion, is likely to seriously harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is the only class of stock we have outstanding, and it trades on the Nasdaq Global Market under
the symbol AWRE. The following table sets forth the high and the low sales prices of our common stock as
reported on the Nasdaq Global Market for the periods indicated from January 1, 2014 to December 31, 2015.
2015
High ..................................
Low ..................................
2014
High ..................................
Low ..................................
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$5.19
4.35
$6.70
5.27
$4.50
3.83
$6.70
5.02
$4.17
2.82
$6.79
3.50
$3.46
2.86
$5.02
3.46
As of February 5, 2016, we had approximately 100 shareholders of record. This number does not include
shareholders from whom shares were held in a “nominee” or “street” name. We paid no dividends in 2015 and 2013.
In 2014, we paid a special cash dividend of $1.75 per share on July 24, 2014. We anticipate that we will continue to
reinvest any earnings to finance future operations although we may also pay additional special cash dividends if our
board of directors deems it appropriate.
We did not sell any equity securities that were not registered under the Securities Act of 1933 during the three
months ended December 31, 2015.
23
Stock Performance Graph
The following stock performance graph compares the performance of Aware’s cumulative stockholder return with
that of a broad market index, the Nasdaq Composite Index, and a published industry index, the RDG Technology
Composite Index. The cumulative stockholder returns for shares of Aware’s common stock and for the market and
industry indices are calculated assuming $100 was invested on December 31, 2010. Aware paid special cash
dividends of $0.00, $2.95, $0.00, $1.75, and $0.00 per share in 2011, 2012, 2013, 2014, and 2015, respectively. The
performance of the market and industry indices is shown on a total return, or dividend reinvested, basis.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Aware, Inc., the NASDAQ Composite Index, and the RDG Technology Composite
Index
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/10
12/11
12/12
12/13
12/14
12/15
Aware, Inc.
NASDAQ Composite
RDG Technology Composite
*$100 invested on 12/31/10 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Aware, Inc. ..................................................
Nasdaq Composite Index. ............................
RDG Technology Composite Index ............
Value of Investment ($)
12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
$105.64 $307.68 $343.05 $344.11 $247.10
$100.00
166.19
100.00
199.95
152.75
100.00
181.32
188.78
177.73
116.92
115.30
100.53
100.56
24
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating data set forth below with respect to our consolidated
financial statements for the fiscal years ended December 31, 2015, 2014 and 2013 are derived from the consolidated
financial statements included elsewhere in this Form 10-K. The data for fiscal years ended December 31, 2012 and
2011 are derived from previously filed consolidated financial statements. The data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our
historical consolidated financial statements, and the related notes to the consolidated financial statements, which can
be found in Item 7 and Item 8.
2011
$16,199
-
3,500
3,581
(1,014)
2,567
$0.12
$0.12
$46,577
48,069
57,851
3,276
54,575
Year ended December 31,
2015
2014
2013
(in thousands, except per share data)
2012
Statements of Comprehensive Income Data
Revenue ........................................................
Patent related income .....................................
Operating income .........................................
Income from continuing operations ...............
Loss from discontinued operations, net of
income taxes ..................................................
Net income .....................................................
Net income per share – basic .........................
Net income per share – diluted ......................
Balance Sheet Data
Cash and cash equivalents ............................
Working capital ............................................
Total assets ....................................................
Total liabilities ..............................................
Total stockholders’ equity ............................
$19,621
43
3,915
4,614
-
4,614
$0.20
$0.20
$51,232
49,335
63,619
7,438
56,181
$23,720
2,127
7,089
4,583
-
4,583
$0.20
$0.20
$43,985
44,745
55,893
3,504
52,389
$19,357
780
5,318
3,752
(1,156)
2,596
$0.12
$0.11
$72,660
75,760
89,329
4,179
85,150
$17,304
87,515
92,558
72,383
(76)
72,307
$3.32
$3.28
$71,074
73,358
85,854
3,958
81,896
25
ITEM 7. 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 income
and comprehensive income stated as a percentage of total revenue:
Revenue:
Software licenses ..............................................................................
Software maintenance .......................................................................
Services.............................................................................................
Hardware ..........................................................................................
Royalties ...........................................................................................
Total revenue ..................................................................................
Costs and expenses:
Cost of hardware ...............................................................................
Cost of services .................................................................................
Research and development ...............................................................
Selling and marketing .......................................................................
General and administrative ...............................................................
Total costs and expenses ................................................................
Patent related income ...........................................................................
Operating income ...............................................................................
Other income (expense) .......................................................................
Interest income ....................................................................................
Income from continuing operations before income taxes ....................
Provision for (benefit from) income taxes ...........................................
Income from continuing operations ....................................................
Loss from discontinued operations, net of income taxes ......................
Net income ...........................................................................................
Year ended December 31,
2014
2013
2015
51%
24
17
6
2
100
4
9
29
20
18
80
-
20
-
1
21
(3)
24
-
24%
36%
18
22
21
3
100
15
10
23
16
15
79
9
30
-
-
30
11
19
-
19%
43%
20
16
16
5
100
12
8
21
18
18
77
4
27
-
2
29
10
19
(6)
13%
Summary of Operations
We are primarily engaged in the development and sale of biometrics products and services. Our software products
are used in government and commercial biometrics systems to identify or authenticate people. Principal government
applications of biometrics systems include border control, visitor screening, law enforcement, national defense,
intelligence, secure credentialing, access control, and background checks. Principal commercial applications
include: i) user authentication for login and access to mobile devices, computers, networks, and software programs;
ii) user authentication for financial transactions and purchases (online and in-person); iii) physical access control to
buildings, and iv) screening and background checks of prospective employees and customers. We sell our software
and services globally through systems integrators and OEMs, and directly to end user customers. We also derive a
minor portion of our revenue from the sale of imaging software licenses to OEMs and systems integrators that
incorporate our software into medical imaging products and medical systems.
26
Summary of Financial Results
We used revenue and operating income to summarize financial results over the past three years as we believe these
measurements are the most meaningful way to understand our operating performance.
Revenue and operating income in 2013, 2014, and 2015 were significantly affected by a contract to provide services
and hardware to the United States Navy (“Navy”) and the United States Marine Corps (“USMC”). Changes in
revenue derived from these customers caused large fluctuations in our revenue as a result of: i) Navy and USMC
service projects beginning and ending; and ii) the receipt and shipment of Navy hardware orders. As of December
31, 2015, we believe the bulk of the service work and hardware shipments have been completed with these
customers. Looking forward, we believe we may receive orders for add-on services, hardware replacement parts for
the Navy, and software licenses for the USMC.
2015 compared to 2014
Revenue and operating income in 2015 were $19.6 million and $3.9 million, respectively, which compared to
revenue and operating income in 2014 of $23.7 million and $7.1 million, respectively.
Revenue decreased by $4.1 million in 2015 primarily as a result of $5.8 million of lower revenue from the Navy and
USMC, which was partially offset by $1.7 million of higher net revenue from other sources. Two of the
contributing factors behind higher net revenue from other sources were sales to commercial customers and a large
imaging software license sale.
Operating income decreased by $3.2 million in 2015 because: i) the $4.1 million revenue decline resulted in $1.1
million less operating income; and ii) patent related income decreased by $2.1 million.
2014 compared to 2013
Revenue and operating income in 2014 were $23.7 million and $7.1 million, respectively, which compared to
revenue and operating income in 2013 of $19.4 million and $5.3 million, respectively.
Revenue increased by $4.4 million in 2014 primarily as a result of $3.5 million of higher revenue from the Navy and
USMC and $0.9 million of higher net revenue from other sources.
Operating income increased by $1.8 million in 2014 because: i) the $4.4 million revenue increase resulted in $0.5
million more operating income; and ii) patent related income increased by $1.3 million. Operating income in 2014
would have been higher had we not increased engineering expenses by $2.3 million to invest in product
development.
Software Licenses
Software licenses consist of revenue from the sale of biometrics and imaging software products. Sales of software
products depend on our ability to win proposals to supply software for biometrics systems projects either directly to
end user customers or indirectly through channel partners.
Software license revenue increased 18% from $8.5 million in 2014 to $10.1 million in 2015. As a percentage of
total revenue, software license revenue increased from 36% in 2014 to 51% in 2015. The $1.6 million increase in
software license revenue was primarily due to: i) a $0.8 million increase in biometrics software license sales; and ii)
a $0.8 million increase in imaging software license sales. The reasons for the increases in biometrics and imaging
software licenses were:
i) Biometrics software licenses – Biometrics software license revenue was $7.9 million in 2015 versus $7.1
million in 2014. The $0.8 million increase was primarily due to higher sales to four commercial customers,
which was partially offset by lower sales to U.S. government customers.
We derived a significant amount of license revenue in 2015 from Certisign, a Brazilian digital
identification company. This revenue was earned during the development phase of a commercial
biometrics-as-a-service platform. Certisign began to roll out its biometrics service offering in early 2016
using the system we developed for it. Under our agreement, we will receive license fees based on
Certisign’s revenue.
27
Our 2015 biometrics software license results generally aligned with trends we are witnessing in the
biometrics market. These trends include: i) greater government opportunities outside of the United States;
ii) emerging commercial opportunities; and iii) uneven demand by the U.S. government.
ii) Imaging software licenses – Imaging software license revenue was $2.2 million in 2015 versus $1.4 million
in 2014. Historically, we have sold most of our imaging software licenses to OEM customers that
incorporate our software into medical imaging products. Revenue to such OEM customers decreased
approximately $0.1 million in 2015. The increase in imaging software license revenue in 2015 was due to
a large non-OEM transaction we consummated in the fourth quarter of 2015.
In October 2015, we signed an agreement with a systems integrator customer to license our imaging
software for inclusion in a U.S. government healthcare management system. The arrangement included a
$4.5 million license fee plus a $125,000 software maintenance fee. We delivered the licensed software and
the customer paid us in the fourth quarter of 2015. However due to the unique nature of the transaction, we
were unable to establish vendor specific objective evidence for the fair value of the maintenance element.
Accordingly, we will recognize revenue over the twelve-month maintenance period that runs from October
2015 to October 2016. We recorded $0.9 million of license revenue in 2015 and deferred $3.6 million of
license revenue. We intend to recognize the remaining $3.6 million of revenue over the period January
2016 to October 2016.
Software license revenue increased 4% from $8.2 million in 2013 to $8.5 million in 2014. As a percentage of total
revenue, software license revenue decreased from 43% in 2013 to 36% in 2014. The dollar increase in software
license revenue was primarily due to a $0.4 million increase in sales of imaging software. Sales of biometrics
software licenses were essentially unchanged from 2013, which reflects approximately the same number of project
wins in both years.
Software Maintenance
Software maintenance consists of revenue from the sale of software maintenance contracts. Software maintenance
contracts entitle customers to receive software support and software updates, if and when they become available,
during the term of the contract.
Software maintenance revenue increased 8% from $4.4 million in 2014 to $4.7 million in 2015. As a percentage of
total revenue, software maintenance revenue increased from 18% in 2014 to 24% in 2015.
Software maintenance revenue increased 13% from $3.9 million in 2013 to $4.4 million in 2014. As a percentage of
total revenue, software maintenance revenue decreased from 20% in 2013 to 18% in 2014.
The dollar increase in software maintenance revenue in 2015 and 2014 was primarily due to a base of maintenance
revenue from contract renewals from prior periods that grows as we sell maintenance contracts with new licenses in
current periods. A majority of our customers purchase software maintenance contracts when they initially purchase
software licenses. Since our software is used in active biometrics systems, many of our customers continue to renew
their maintenance contracts in subsequent years while systems remain operational.
Services
Services consist 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 government customers or in conjunction with channel partners. Services revenue will
fluctuate when we commence new projects and/or when we complete projects that were started in previous periods.
Services decreased 36% from $5.2 million in 2014 to $3.3 million in 2015. As a percentage of total revenue,
services decreased from 22% in 2014 to 17% in 2015. The dollar decrease in services revenue was due to a $2.8
million decrease from government customers, which was partially offset by a $0.9 million increase from commercial
customers. The dollar decrease in government services revenue was primarily due to lower revenue from U.S.
government customers, including the Navy and USMC. The majority of the services work on Navy and USMC
28
projects had been completed as of the end of 2015, however we expect that we may receive orders for add-on
services in the future.
Lower services revenue from government projects in 2015 was partially offset by higher revenue from two projects
with customers that are developing biometrics systems for commercial applications. The majority of the services
work on the commercial projects had been completed as of the end of 2015, however we expect that we may receive
orders for add-on services in the future.
Due to the substantial completion of government and commercial projects in 2015, services revenue in 2016 may
decline compared to comparable periods in 2015 unless we are able to replace those completed projects with new
services projects. Our services backlog of $0.3 million was minimal as of December 31, 2015.
Services increased 64% from $3.1 million in 2013 to $5.2 million in 2014. As a percentage of total revenue,
services increased from 16% in 2013 to 22% in 2014. The dollar increase in services revenue was due to: i) a $1.6
million increase from direct government customers; and ii) a $0.4 million increase from channel partners and direct
commercial customers. The increase in direct government services was primarily due to a significant project with a
U.S. government customer that commenced in the third quarter of 2013 and continued throughout 2014. The $0.4
million increase in services revenue from channel partners and direct commercial customers was attributable to an
increase in projects with a number of customers in 2014 as opposed to large projects with a small number of
customers.
Hardware
Hardware revenue consists of sales of biometrics equipment to a single U.S. government customer for whom we
developed biometrics software. Hardware products sold to this customer integrate hardware purchased from third
parties with software from other third parties as well as software from Aware. We evaluated the classification of
gross versus net revenue recognition and determined gross recognition was appropriate.
Hardware revenue decreased 78% from $4.9 in 2014 to $1.1 million in 2015. As a percentage of total revenue,
hardware revenue decreased from 21% in 2014 to 6% in 2015. The dollar decrease in hardware revenue was due to
a decrease in units ordered by the Navy in 2015.
Hardware revenue increased 55% from $3.2 in 2013 to $4.9 million in 2014. As a percentage of total revenue,
hardware revenue increased from 16% in 2013 to 21% in 2014. The dollar increase in hardware revenue was due to
an increase in units ordered by the Navy in 2014.
We have a $0.3 million order for hardware products in backlog as of December 31, 2015. Beyond this order, we
believe that future hardware orders from the Navy may be minimal as we believe it has completed the bulk of its
purchasing. It is worth noting that our strategy does not include maintaining or growing biometrics hardware
revenue. We agreed to provide hardware products as an accommodation to this important customer.
Royalties
Royalties consist primarily of royalty payments we receive under DSL silicon contracts with two customers that
incorporate our silicon intellectual property (“IP”) in their DSL chipsets. We sold the assets of our DSL IP business
in 2009, but we continue to receive royalty payments from these customers. Royalties are reported in continuing
operations in accordance with ASC 205-20, Reporting Discontinued Operations, because we have continuing
ongoing cash flows from this business.
Royalties decreased 44% from $0.7 million in 2014 to $0.4 million in 2015. As a percentage of total revenue,
royalties decreased from 3% in 2014 to 2% in 2015.
Royalties decreased 21% from $0.9 million in 2013 to $0.7 million in 2014. As a percentage of total revenue,
royalties decreased from 5% in 2013 to 3% in 2014.
29
The royalty dollar decrease in 2015 and 2014 was primarily due to lower DSL royalties from both of our licensees.
We do not consider DSL royalties to be a key element of our business and we expect that this revenue will continue
to decline in future periods.
Cost of Hardware
Cost of hardware consists primarily of the cost of third party equipment and software included in hardware
shipments.
Cost of hardware decreased by 79% from $3.5 million in 2014 to $0.7 million in 2015. Cost of hardware as a
percentage of hardware revenue decreased from 71% in 2014 to 65% in 2015, which means that product gross
margins increased from 29% in 2014 to 35% in 2015. The dollar decrease in cost of hardware was due to lower unit
shipments of hardware products in the current year period compared to the prior year period.
Cost of hardware increased by 47% from $2.4 million in 2013 to $3.5 million in 2014. Cost of hardware as a
percentage of hardware revenue decreased from 74% in 2013 to 71% in 2014, which means that product gross
margins increased from 26% in 2013 to 29% in 2014. The dollar increase in cost of hardware was due to higher unit
shipments of hardware products in the current year period compared to the prior year period.
Cost of Services
Cost of services consists of engineering costs to perform customer services projects. Such costs primarily include: i)
engineering salaries, stock-based compensation, fringe benefits, and facilities; and ii) engineering consultants and
contractors.
Cost of services decreased 24% from $2.4 million in 2014 to $1.8 million in 2015. Cost of services as a percentage
of services increased from 46% in 2014 to 54% in 2015, which means that gross margins on services decreased from
54% to 46%. The dollar decrease in cost of services was attributable to a decrease in services revenue.
Cost of services increased 57% from $1.5 million in 2013 to $2.4 million in 2014. Cost of services as a percentage
of services decreased from 48% in 2013 to 46% in 2014, which means that gross margins on services increased from
52% to 54%. The dollar increase in cost of services was attributable to an increase in services revenue.
Gross margins on services of 46%, 54%, and 52% in 2015, 2014 and 2013, respectively, were a function of: i) the
nature of the projects; ii) the level of engineering difficulty and labor hours required to complete project tasks; and
iii) how much we were able to charge. Gross margins in these years reflect the profitability mix of customer
projects. We expect that gross margins on services will continue to fluctuate in future periods based on the nature,
complexity, and pricing of future projects.
Research and Development Expense
Research and development expense consists of costs for: i) engineering personnel, including salaries, stock-based
compensation, fringe benefits, and facilities; ii) engineering consultants and contractors, and iii) other engineering
expenses such as supplies, equipment depreciation, dues and memberships and travel. Engineering costs incurred to
develop our technology and products are classified as research and development expense. As described in the cost of
services section, engineering costs incurred to provide engineering services for customer projects are classified as
cost of services, and are not included in research and development expense.
The classification of total engineering costs to research and development expense and cost of services was (in
thousands):
Research and development expense ............................
Cost of services ...........................................................
Total engineering costs ............................................
Years ended December 31,
2015
$5,800
1,790
$7,590
2014
$5,505
2,359
$7,864
2013
$4,085
1,503
$5,588
30
Research and development expense increased 5% from $5.5 million in 2014 to $5.8 million in 2015. As a
percentage of total revenue, research and development expense increased from 23% in 2014 to 29% in 2015. The
increase in research and development expense was primarily due to engineers rotating off of customer projects and
onto internal development projects.
As the table above indicates, total engineering costs decreased from $7.9 million in 2014 to $7.6 million in 2015.
The spending decrease is due to the following factors, which in the aggregate resulted in $0.3 million less expense:
i) higher compensation expenses for engineers hired in 2014 for which there was a partial year of expense in 2014
versus a full year in 2015; ii) higher amortization expenses for acquired technology; iii) lower compensation and
contractor expenses due to the termination of employees and contractors working on government service projects;
iv) lower contractor expenses due to the termination of contractors working on internal development projects; and v)
lower recruiting fees due to reduced hiring in 2015. Our engineering headcount declined by one head in 2015. We
believe our engineering organization was adequately staffed as of December 31, 2015.
Research and development expense increased 35% from $4.1 million in 2013 to $5.5 million in 2014. As a
percentage of total revenue, research and development expense increased from 21% in 2013 to 23% in 2014.
As the table above indicates, total engineering costs increased from $5.6 million in 2013 to $7.9 million in 2014.
The spending increase was primarily due to the hiring of engineering employees and contractors. In the 18 month
period from June 30, 2013 to December 31, 2014, engineering headcount, excluding contractors, grew from 30 to 48
employees. The expansion of our engineering organization during this period was designed to provide the resources
we required to: i) pursue new product development initiatives; and ii) staff customer engineering services projects.
As we described in the strategy section in Part 1 of this Form 10-K, we intend to introduce new products that will
allow us to offer more complete biometrics solutions. We believe this strategy will allow us to sell more software
into biometrics systems projects in order to grow our revenue. Our preference is to develop such products
internally, however to the extent we are unable to do that, we may purchase or license technologies from third
parties. We anticipate that we will continue to focus our future research and development activities on enhancing
existing products and developing new products.
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.
Sales and marketing expense increased 5% from $3.7 million in 2014 to $3.9 million in 2015. As a percentage of
total revenue, sales and marketing expense increased from 16% in 2014 to 20% in 2015. The dollar increase in
selling and marketing expense was primarily due to the addition of one employee in our sales organization which
was partially offset by the departure of another employee in the second half of the year.
Sales commissions were $35,000 higher in 2015 despite a $4.1 million decrease in total revenue. The small
commission increase was due to higher license sales and Brazilian sales agent commissions. There was not a
significant reduction of commission expense related to hardware and royalties, which declined by a total of $4.2
million in 2015, because we pay reduced commissions on hardware sales and no commissions on royalties.
Sales and marketing expense increased 12% from $3.3 million in 2013 to $3.7 million in 2014. As a percentage of
total revenue, sales and marketing expense decreased from 18% in 2013 to 16% in 2014. The dollar increase in
selling and marketing expense was primarily due to higher sales commissions on higher revenue in 2014, and the
addition of one sales and marketing employee in early 2014.
General and Administrative Expense
General and administrative expense consists primarily of costs for: i) officers, directors and administrative
personnel, including salaries, bonuses, director compensation, stock-based compensation, fringe benefits, and
facilities; ii) professional fees, including legal and audit fees; iii) public company expenses; and iv) other
administrative expenses, such as insurance costs and bad debt provisions.
31
General and administrative expense decreased 5% from $3.7 million in 2014 to $3.5 million in 2015. As a
percentage of total revenue, general and administrative expense increased from 15% in 2014 to 18% in 2015. The
dollar decrease in general and administrative expense in 2015 was primarily due to lower stock-based compensation
and patent filing costs.
General and administrative expense increased 4% from $3.5 million in 2013 to $3.7 million in 2014. As a
percentage of total revenue, general and administrative expense decreased from 18% in 2013 to 15% in 2014. The
increase in general and administrative expense in 2014 was primarily due to an increase in stock-based
compensation which was partially offset by lower patent filing expenses.
Patent Related Income
The composition of patent related income in 2015, 2014 and 2013 was as follows:
Year ended December 31, 2015. We had a $43,000 gain on the sale of patent assets in 2015, which is described
below:
We sold a portion of our patent portfolio pertaining to home networking technology to an unrelated third party
for $50,000. The proceeds from the sale were reduced by $7,000 of transaction costs, which consisted primarily
of fees from the law firm that assisted us in the sale. We recorded a gain of $43,000 on the sale.
Future patent sales are likely to be minimal as our remaining patents and patent applications pertain primarily to
biometrics and imaging compression. Our current intent is to retain these patents for use in the business.
Year ended December 31, 2014. We had a $2.1 million gain on the sale of patent assets in 2014, which is described
below:
We sold a portion of our patent portfolio pertaining to DSL diagnostic technology to an unrelated third party for
$2.6 million. The proceeds from the sale were reduced by $0.5 million of transaction costs, which consisted
primarily of fees from the law firm that assisted us in the sale. We recorded a gain of $2.1 million on the sale.
The DSL diagnostic technology in the patents we sold in 2014 was related to our DSL Service Assurance
business that we shut down in 2012 and 2013 and reported in discontinued operations in those periods. We do
not consider our patent related activities to be a component of the operating business from which the underlying
technology was derived, but rather as a component of corporate general and administrative expenses.
Accordingly the gain on the sale of these patents was reported in income from continuing operations.
The gains on the sale of patents was included in income from continuing operations pursuant to ASC 360-10,
Impairment or Disposal of Long-Lived Assets, and Rule 5-03 of Regulation S-X.
Year ended December 31, 2013. We had $0.8 million of income from a patent arrangement in 2013, which is
described below:
We entered into an arrangement with an unaffiliated third party in 2010 under which we assigned certain
patents in return for royalties on proceeds from patent monetization efforts by the third party. Such third party
has engaged in various patent monetization activities, including enforcement, litigation and licensing. The party
reported and we recorded $0.8 million of income from this arrangement in the year ended December 31, 2013.
We continue to have a contractual relationship with this third party. However, we are unable to predict how
much more income we might receive from this arrangement, if any, because:
The claims in one of the patents we assigned were rejected by the United States Patent Office
(“USPTO”) in May 2013. The USPTO’s Patent Trial & Appeal Board (“PTAB”) affirmed the USPTO
decision in June 2014. The PTAB decision was appealed to the Federal Circuit. In December 2014,
the Federal Circuit remanded the appeal back to the PTAB for further consideration. In August 2015,
the PTAB remanded the case back to the USPTO patent examiner of record for further review. In
November 2015, the USPTO confirmed the validity of the claims in the patent.
Even though the USPTO has confirmed the validity of the claims in the patent, we do not know
whether any patent monetization efforts by the third party will be successful.
32
Other Income/(Expense)
We recorded other income of $12,000 and $23,000 in the years ended December 31, 2015 and 2013, respectively,
and other expense of $59,000 in the year ended December 31, 2014. Other income or expense in all three years
consisted of realized gains or losses on sales or calls of high yield bond investments.
Interest Income
Interest income decreased 33% from $225,000 in 2014 to $151,000 in 2015. The dollar decrease was primarily due
to i) lower levels of high yield bond investments held in 2015 as compared to 2014; and ii) lower cash balances as a
result of a $39.9 million dividend payment in July 2014.
Interest income decreased 31%, or $103,000, from $328,000 in 2013 to $225,000 in 2014. The dollar decrease was
primarily due to i) lower levels of high yield bond investments held in 2014 as compared to 2013; and ii) lower cash
balances as a result of a $39.9 million dividend payment in July 2014.
Income Taxes
We are subject to income taxes in the United States and we use estimates in determining our provisions for income
taxes. We account for income taxes using the asset and liability method for accounting and reporting income taxes.
Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates.
A discussion of income taxes for the years ended December 31, 2015, 2014, and 2013 follows:
Year ended December 31, 2015. We recorded a benefit from income taxes of $0.5 million for the year ended
December 31, 2015, all of which was included in continuing operations. The benefit from income taxes was the
result of a $1.9 million tax benefit from the reversal of a reserve for uncertain tax positions, which was partially
offset by $1.4 million of income taxes on pre-tax income based on the U.S. statutory rate of 34%, increased by state
income taxes, and reduced by research tax credits and permanent adjustments.
As previously reported, the Internal Revenue Service (“IRS”) commenced an examination of our tax return for the
year ended December 31, 2012 in September 2014. In July 2015, the IRS notified us that it had completed its
examination and that it had no changes to our reported tax. As a result of the completion of the IRS examination, we
determined that a $1.9 million reserve for uncertain tax positions we had established on federal research and
development credits was no longer required. We reversed the reserve in the third quarter of 2015.
As of December 31, 2015, we had a total of $1.0 million of deferred tax assets for which we had recorded no
valuation allowance. We will continue to assess the level of valuation allowance in future periods. Should evidence
regarding the realizability of tax assets change at a future point in time, the valuation allowance will be adjusted
accordingly.
In addition to deferred tax assets carried on our balance sheet, we also had net federal and state research and
development credit carryforwards available at December 31, 2015 of $5.5 million and $0.1 million. These credits
were not recorded as tax assets as they relate to excess stock compensation deductions that may not be recorded as
tax assets under generally accepted accounting principles until the amounts have been utilized to reduce our tax
liability. To the extent that these assets can be used to reduce taxes, the benefit must be recorded as a reduction to
additional paid-in capital. In 2015, we recorded a tax benefit of $0.6 million to equity related to the use of these tax
credits to reduce our tax liability.
Year ended December 31, 2014. Total income tax expense for the year ended December 31, 2014 was $2.7 million,
all of which was recorded in continuing operations. Income tax expense for 2014 was based on the U.S. statutory
rate of 34%, increased by state income taxes, and reduced by Federal research tax credits and permanent
adjustments.
In 2014, we recorded a tax benefit of $1.2 million that reduced our tax liability. This benefit was recorded in equity
as it was related to federal and state research tax credits that represented excess stock compensation deductions.
33
Year ended December 31, 2013. Total income tax expense for the year ended December 31, 2013 was $1.2 million,
including $1.9 million that was recorded in continuing operations less a tax benefit of $0.7 million that was recorded
in discontinued operations. Income tax expense for 2013 was based on the U.S. statutory rate of 34%, increased by
state income taxes, and reduced by Federal research tax credits and permanent adjustments. Tax expense in 2013
also reflects two items related to 2012, including: i) a tax benefit of $95,000 related to the 2012 research tax credit.
This credit was extended retroactively back to January 1, 2012, by the American Taxpayer Relief Act of 2012,
which was enacted on January 2, 2013; and ii) a tax benefit of $148,000 related to a reduction in the estimate of the
2012 tax expense recorded in our 2012 financial statements.
In 2013, we recorded a tax benefit of $128,000 that reduced our tax liability. This benefit was recorded in equity as
it was related to federal and state research tax credits that represented excess stock compensation deductions.
Loss from discontinued operation, net of income taxes.
Loss from discontinued operations, net of income taxes reflects results from our discontinued DSL Service
Assurance Segment. This segment includes results from our DSL software product line that we shut down in 2013.
Loss from DSL discontinued operations was (in thousands):
Years ended December 31,
2014
2015
2013
Revenue .......................................................................
Expenses .....................................................................
Loss before income taxes .........................................
Income tax benefit ......................................................
Loss from discontinued operations ..........................
$-
-
-
-
$-
$-
-
-
-
$-
$3,216
5,120
(1,904)
(748)
($1,156)
34
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed the company with our cash balances, cash generated from operations, and cash
received from the sale of patent assets. Equity financing has not been a meaningful source of financing for us in
recent years. Cash flows from operating, investing and financing activities are described below.
Cash flow from operating activities
In the years ended December 31, 2015, 2014, and 2013, our operating activities provided net cash of $6.7 million,
$6.3 million, and $2.8 million, respectively. A discussion of cash flow from operating activities for each of the last
three years follows:
Year ended December 31, 2015. Cash provided by operating activities of $6.7 million in 2015 was primarily the
result of net income of $4.6 million, which was increased for non-cash items related to depreciation and
amortization of $0.6 million and stock-based compensation expense of $0.7 million. Cash provided by operating
activities was reduced by a $1.9 million non-cash item related to the reversal of a reserve for uncertain tax
positions that was included as a tax benefit in net income. Cash provided by operating activities also included
$2.7 million of cash associated with a reduction of working capital items. The reduction of working capital
includes a significant increase in deferred revenue as a result of a $4.6 million revenue transaction payment in
2015 for which we deferred $3.7 million of license and maintenance revenue.
Year ended December 31, 2014. Cash provided by operating activities of $6.3 million in 2014 was primarily the
result of net income of $4.6 million, which was increased for non-cash items related to depreciation and
amortization of $0.5 million and stock-based compensation expense of $0.9 million. Cash provided by operating
activities also included $2.4 million of cash associated with a reduction of working capital items. Cash provided
by these sources was partially offset by a $2.1 million gain on the sale of patent assets that was included in $4.6
million of net income, but was included in cash flow from investing activities in the statements of cash flow.
Year ended December 31, 2013. Cash provided by operations of $2.8 million in 2013 was primarily the result of
net income of $2.6 million, which was increased for non-cash items related to depreciation and amortization of
$0.5 million and stock-based compensation expense of $0.7 million. Cash provided from these sources was
partially offset by $1.0 million of net cash used to fund working capital items.
Cash flow from investing activities
In the year ended December 31, 2015 and 2014, our investing activities provided net cash of $0.1 million and $3.4
million, respectively. In the year ended December 31, 2013, our investing activities used net cash of $1.4 million.
A discussion of cash flow from investing activities for each of the last three years follows:
Year ended December 31, 2015. Cash provided by investing activities of $0.1 million in 2015 was primarily the
result of $0.5 million of proceeds from the sale of investments, which was partially offset by $0.1 million of
capital expenditures and $0.3 million used to purchase other assets.
Year ended December 31, 2014. Cash provided by investing activities of $3.4 million in 2014 was primarily the
result of $2.1 million of net proceeds from the sale of patent assets and $1.4 million of proceeds from the sale of
investments. Cash provided from these sources was partially offset by $0.1 million of capital expenditures.
Year ended December 31, 2013. Cash used by investing activities of $1.4 million in 2013 was primarily the
result of $0.2 million of capital expenditures, $0.9 million of net investment purchases, and $0.3 million used to
purchase other assets.
We have no material commitments for capital expenditures.
Cash flow from financing activities
In the years ended December 31, 2015 and 2013, our financing activities provided net cash of $0.4 million and
$122,000, respectively. In the year ended December 31, 2014, our financing activities used net cash of $38.4
million. A discussion of cash flow from financing activities for each of the last three years follows:
Year ended December 31, 2015. Cash provided by financing activities of $0.4 million in 2015 was primarily the
result of a $0.6 million tax benefit related to excess stock-based compensation, which was partially offset by
$0.2 million used to repurchase stock from employees in connection with stock issuances under a stock grant
program.
35
Year ended December 31, 2014. Cash used by financing activities of $38.4 million in 2014 was primarily the
result of a $39.9 million dividend payment and $0.2 million used to repurchase stock from employees in
connection with stock issuances under a stock grant program. Cash used by these two items was partially offset
by: i) a $1.2 million tax benefit related to excess stock-based compensation; and ii) $0.5 million of proceeds
from the exercise of stock options.
Year ended December 31, 2013. Cash provided by financing activities of $122,000 in 2013 was primarily the
result of $65,000 of proceeds from the issuance of stock under employee stock programs and $128,000 of
excess tax benefits from stock-based compensation. Cash provided by these two factors was partially offset by
$71,000 used to repurchase stock from employees in connection with stock issuances under a stock grant
program.
At December 31, 2015, we had cash and cash equivalents of $51.2 million and investments of $0.9 million. While
we cannot assure you that we will not require additional financing, or that such financing will be available to us, we
believe that our cash and cash equivalents and investments will be sufficient to fund our operations for at least the
next twelve months.
To date, inflation has not had a material impact on our financial results. There can be no assurance, however, that
inflation will not adversely affect our financial results in the future.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any arrangements with unconsolidated entities, such as entities often referred to as
structured finance, special purpose entities, or variable interest entities which are often established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are
not exposed to any financing, liquidity, market or credit risk if we had such relationships.
36
CONTRACTUAL OBLIGATIONS
We have various contractual obligations impacting our liquidity. The following represents our contractual
obligations as of December 31, 2015 (in thousands):
Contractual Obligations
Total
1 year
1-3 years
3-5 years
5 years
Payments Due By Period
Less than
More than
Purchase orders
Total
$32
$32
$32
$32
$-
$-
$-
$-
$-
$-
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies related to revenue recognition, stock-based compensation, income taxes,
and the allowance for doubtful accounts to be critical policies.
Revenue recognition. We derive revenue from five sources: (i) software licenses; (ii) software maintenance; (iii)
software services; iv) hardware; and (v) royalties.
We recognize revenue when there is persuasive evidence of an arrangement, the sales price is fixed or determinable,
collection of the related receivable is reasonably assured, and delivery has occurred or services have been rendered.
As described below, we make significant judgments during the process of determining revenue for any particular
accounting period.
In determining revenue recognition, we assess whether fees associated with revenue transactions are fixed or
determinable based on the terms of the contract and based on payment terms. If the fee is not fixed or determinable,
we defer the fee and recognize revenue as amounts become due and payable. We assess whether collection is
reasonably assured based on a number of factors, including past transaction history with the customer and the credit-
worthiness of the customer. If we determine that collection of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably assured.
We must also make judgments with respect to the recognition of revenue for multiple element revenue
arrangements. We recognize revenue for multiple element arrangements as follows:
Software and software related multiple element arrangements:
We sell software licenses, software maintenance and software services in various combinations of multiple element
arrangements. We apply the provisions of ASC 985-605, Software Revenue Recognition, to these arrangements
because all the elements are software or software related. The various combinations of multiple element
arrangements and our revenue recognition for each are described below:
o When software licenses and maintenance contracts are sold together, we recognize software license revenue
upon delivery, provided we have vendor specific objective evidence (“VSOE”) for the fair value of the
maintenance contract fee, and we recognize the fair value of maintenance contract revenue ratably over the
related contract period. When we do not have VSOE for PCS, we recognize the entire arrangement fee over the
contractual PCS period.
o When software engineering services and software licenses are sold together, the total fee is generally recognized
by applying contract accounting. We have adopted the percentage-of-completion method of contract
accounting, and we primarily use an input method (i.e., labor hours) to determine our completion percentage.
o When we sell software licenses, software maintenance, and software services together, revenue is recognized as
follows: i) maintenance revenue is separated from the other two elements and is recognized ratably over the
related contract period; provided we have VSOE for the fair value of the maintenance element; and ii) the total
fee from the software license and engineering service elements is recognized by applying the contract
accounting method described in the previous paragraph.
37
Hardware and software multiple element arrangements:
o We also have a multiple element arrangement with one customer that involves the delivery of hardware,
software maintenance, and software services. We determined that these elements qualified as separate units of
accounting under ASC 605, Revenue Recognition, because they have value to the customer on a standalone
basis. Accordingly, we recognize hardware revenue upon delivery and acceptance by the customer,
maintenance revenue ratably over the related contract period, and service revenue as services are delivered.
Our revenue recognition policies are described more fully in Note 2, Summary of Significant Accounting Policies,
in the Notes to our Consolidated Financial Statements.
Stock-Based Compensation. We grant stock and stock options to our employees and directors, although stock
option grants in recent years have been minimal. We measure stock-based compensation cost at the grant date based
on the fair value of the award and recognize it as expense over the applicable vesting period of the award using the
straight-line basis.
For stock awards, we determine the fair value of the award by using the fair market value of our stock on the date of
grant, provided the number of shares in the grant is fixed on the grant date.
For stock options, we use the Black-Scholes valuation model to estimate the fair value of the award. This valuation
model takes into account the exercise price of the award, as well as a variety of significant assumptions. The
assumptions used to estimate the fair value of stock options include the expected term, the expected volatility of our
stock over the expected term, the risk-free interest rate over the expected term, and our expected annual dividend
yield.
Income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate
our actual current tax expense. We must also estimate temporary and permanent differences that result from
differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to the extent we believe recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this
allowance in a period for deferred tax assets, which have been recognized, we must include an expense with the tax
provision in the statement of operations. Conversely, to the extent we decrease our valuation allowance in a period
for deferred tax assets, which have been previously reserved, we must include a tax benefit with the tax provision in
the statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets,
and any valuation allowance recorded against our net deferred tax assets. Our deferred tax assets primarily relate to
temporary differences that result from differing treatment of certain items for tax and accounting purposes. As of
December 31, 2015, we had a total of $1.0 million of deferred tax assets for which we had recorded no valuation
allowance.
We will continue to assess the level of valuation allowance required in future periods. Should evidence regarding the
realizability of tax assets change at a future point in time, the valuation allowance will be adjusted accordingly.
Allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and
provide allowances for receivables when collection becomes doubtful. Provisions are made based upon a specific
review of all significant outstanding invoices. 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.
38
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is the
result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to clarify the
principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial
Reporting Standards (“IFRS”) that would: remove inconsistencies and weaknesses, provide a more robust
framework for addressing revenue issues, improve comparability of revenue recognition practices across entities,
jurisdictions, industries, and capital markets, improve disclosure requirements and resulting financial statements,
and simplify the presentation of financial statements. The core principle of the new guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is
effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. On July
9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year, but to permit entities to
choose to adopt the standard as of the original effective date. We are currently evaluating the effect that the updated
standard will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued Accounting Standard Update ("ASU") 2015-17, "Balance Sheet Classification
of Deferred Taxes," which requires that deferred tax liabilities and assets be classified as noncurrent in a classified
statement of financial position to simplify the presentation of deferred income taxes. The standard is effective
prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with
early adoption permitted. The Company did not early adopt this standard. The effect of early adoption would not
have been material as it would have only resulted in a $184,000 reclass of short term deferred tax assets to long term
deferred tax assets on our December 31, 2015 consolidated balance sheets.
With the exception of the two standards above, there have been no other recently issued accounting pronouncements
that are of significance or potential significance to us that we have not adopted as of December 31, 2015.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio, and the effect that changes in interest rates
would have on that portfolio. Our investment portfolio at December 31, 2015 consisted of two elements:
1. Cash and cash equivalents. As of December 31, 2015, our cash and cash equivalents of $51.2 million were
primarily invested in money market funds. The money market funds were invested in high quality, short term
financial instruments. Due to the nature, short duration, and professional management of these funds, we do not
expect that a general increase in interest rates would result in any material loss.
2.
Investments. As of December 31, 2015, our investments of $0.9 million were invested in high yield bonds with
two corporate debt issuers, which mature in 2017 and 2018. While we are exposed to default risk, the high
current yield of these bonds largely mitigates interest rate risk. Therefore, due to the high current yield and the
two to three year life of these instruments, we do not believe that a general increase in interest rates would result
in any material loss.
We do not use derivative financial instruments for speculative or trading purposes.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Aware, Inc,
We have audited the accompanying consolidated balance sheets of Aware, Inc. (“the Company”) as of December 31,
2015 and 2014, and the related consolidated statements of income and comprehensive income, stockholders’ equity
(deficit) and cash flows for each of the three years in the period ended December 31, 2015 and the financial
statement schedule of Aware, Inc. listed in Item 15(a). We also have audited the Company’s internal control over
financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The
Company’s management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on these financial statements and an opinion on the Company's internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audit of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash
flows for the years in the three-year period ended December 31, 2015, in conformity with accounting principles
generally accepted in the United States of America, and in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
/s/ RSM US LLP
Boston, Massachusetts
February 12, 2016
40
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents ........................................................................
Accounts receivable (less allowance for doubtful
accounts of $20 at December 31, 2015 and 2014) .................................
Deferred tax assets ....................................................................................
Prepaid expenses and other current assets ................................................
Total current assets .............................................................................
Property and equipment, net ..........................................................................
Investments ...................................................................................................
Long term deferred tax assets .......................................................................
Other assets ....................................................................................................
Total assets ..........................................................................................
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ......................................................................................
Accrued expenses .....................................................................................
Accrued income taxes ...............................................................................
Deferred revenue ......................................................................................
Total current liabilities ......................................................................
Long-term deferred revenue ..........................................................................
Commitments and contingent liabilities (Note 8)
Stockholders’ equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding .................................................................................
Common stock, $.01 par value; shares authorized,
70,000,000 in 2015 and 2014; issued
and outstanding 22,935,988 in 2015 and 22,808,761 in 2014 ..........
Additional paid-in capital ........................................................................
Accumulated other comprehensive loss ...................................................
Accumulated deficit .................................................................................
Total stockholders’ equity.................................................................
Total liabilities and stockholders’ equity ..........................................
December 31,
2015
2014
$51,232
$43,985
4,743
184
483
56,642
4,977
869
815
316
$63,619
$234
952
236
5,885
7,307
131
3,619
168
403
48,175
5,289
1,428
804
197
$55,893
$258
820
-
2,352
3,430
74
-
-
229
102,968
(64)
(46,952)
56,181
$63,619
228
103,756
(29)
(51,566)
52,389
$55,893
The accompanying notes are an integral part of the consolidated financial statements.
41
AWARE, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Revenue:
Software licenses ..............................................................................
Software maintenance .......................................................................
Services .............................................................................................
Hardware .........................................................................................
Royalties ...........................................................................................
Total revenue ..................................................................................
Costs and expenses:
Cost of hardware ...............................................................................
Cost of services .................................................................................
Research and development ...............................................................
Selling and marketing .......................................................................
General and administrative ...............................................................
Total costs and expenses ................................................................
Years ended December 31,
2015
2014
2013
$10,113
4,706
3,304
1,094
404
19,621
717
1,790
5,800
3,945
3,497
15,749
$8,537
4,351
5,173
4,933
726
23,720
3,485
2,359
5,505
3,741
3,668
18,758
$8,241
3,866
3,148
3,182
920
19,357
2,365
1,503
4,085
3,344
3,522
14,819
Patent related income ...........................................................................
43
2,127
780
Operating income ...............................................................................
Other income (expense) .......................................................................
Interest income ....................................................................................
Income from continuing operations before income taxes ....................
Provision for (benefit from) income taxes ...........................................
Income from continuing operations ....................................................
Loss from discontinued operations, net of income taxes ......................
Net income ...........................................................................................
Basic net income per share:
Basic net income per share from continuing operations .......................
Basic net loss per share from discontinued operations .........................
Basic net income per share ...............................................................
Diluted net income per share:
Diluted net income per share from continuing operations ....................
Diluted net loss per share from discontinued operations ......................
Diluted net income per share ............................................................
3,915
12
151
4,078
(536)
4,614
-
$4,614
$0.20
-
$0.20
$0.20
-
$0.20
7,089
(59)
225
7,255
2,672
4,583
-
$4,583
$0.20
-
$0.20
$0.20
-
$0.20
5,318
23
328
5,669
1,917
3,752
(1,156)
$2,596
$0.17
(0.05)
$0.12
$0.16
(0.05)
$0.11
Weighted-average shares - basic .............................................................
Weighted-average shares - diluted ..........................................................
22,899
22,965
22,703
22,787
22,543
22,641
Comprehensive income:
Net income ............................................................................................
Other comprehensive income (net of tax):
Unrealized gain/(loss) on available for sale securities .......................
Comprehensive income ..........................................................................
$4,614
$4,583
$2,596
(35)
$4,579
96
$4,679
(75)
$2,521
The accompanying notes are an integral part of the consolidated financial statements.
42
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income ..........................................................................
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...........................................
Stock-based compensation ................................................
Reversal of reserve for uncertain tax positions ..................
Gain on sale of patent assets ..............................................
Amortization of premium (discount) on investments ........
(Gain)/loss on sale of investments ....................................
Deferred tax benefit (expense) on other comprehensive
income ............................................................................
Loss on disposal of property and equipment ....................
Increase (decrease) from changes in assets and liabilities:
Accounts receivable ........................................................
Receivable from patent arrangement ..............................
Inventories ......................................................................
Prepaid expenses and other current assets ......................
Deferred tax assets ..........................................................
Accounts payable ............................................................
Accrued expenses ...........................................................
Accrued income taxes .....................................................
Deferred revenue ............................................................
Net cash provided by operating activities .....................
Cash flows from investing activities:
Purchases of property and equipment ..................................
Proceeds from sale of property and equipment ...................
Purchases of investments .....................................................
Sales of investments ............................................................
Proceeds from sale of patent assets, net ..............................
Purchase of other assets .......................................................
Net cash provided by (used in) investing activities ......
Cash flows from financing activities:
Proceeds from issuance of common stock ..........................
Payment of dividends .........................................................
Excess tax benefits from stock-based compensation ...........
Payments made for taxes of employees who surrendered
shares related to unrestricted stock ...................................
Net cash provided by (used in) financing activities ......
Years ended December 31,
2015
2014
2013
$4,614
$4,583
$2,596
640
689
(1,914)
(43)
(11)
(12)
18
-
(1,124)
-
2
(82)
(27)
(24)
132
236
3,590
6,684
(127)
-
-
529
43
(320)
125
40
-
554
(156)
438
541
915
-
(2,127)
(3)
59
(66)
-
963
-
1,599
294
173
(1,258)
23
-
560
6,256
(135)
-
-
1,432
2,127
-
3,424
508
(39,905)
1,247
(205)
(38,355)
(28,675)
72,660
458
662
-
-
15
(23)
81
28
(1,125)
1,121
(1,601)
(167)
563
1,188
(310)
-
(657)
2,829
(160)
24
(2,008)
1,117
-
(338)
(1,365)
65
-
128
(71)
122
1,586
71,074
Increase/(decrease) in cash and cash equivalents ....................
Cash and cash equivalents, beginning of year .........................
7,247
43,985
Cash and cash equivalents, end of year ..................................
$51,232
$43,985
$72,660
Supplemental disclosure:
Cash paid for income taxes
$571
$1,018
$542
The accompanying notes are an integral part of the consolidated financial statements.
43
AWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
(Accumulated
Deficit)
Total
Stockholders’
Equity
Balance at December 31, 2012 ..........................
22,510
$225
$100,561
($50)
($18,840)
$81,896
Exercise of common stock options .................
Issuance of unrestricted stock .........................
Shares surrendered by employees to
pay taxes related to unrestricted stock .........
Issuance of common stock under
employee stock purchase plan .....................
Stock-based compensation expense ................
Tax benefits from stock-based awards ............
Deferred tax asset write-off ............................
Accumulated other comprehensive loss:
Unrealized loss on securities .......................
Deferred tax benefit on unrealized loss .......
Net income ......................................................
6
65
(14)
7
-
1
-
-
26
(1)
(71)
40
662
128
(52)
(156)
81
2,596
26
-
(71)
40
662
128
(52)
(156)
81
2,596
Balance at December 31, 2013 ..........................
22,574
226
101,293
(125)
(16,244)
85,150
Exercise of common stock options .................
Issuance of unrestricted stock .........................
Shares surrendered by employees to
pay taxes related to unrestricted stock .........
Issuance of common stock under
employee stock purchase plan .....................
Stock-based compensation expense ................
Tax benefits from stock-based awards ............
Dividend payment ...........................................
Accumulated other comprehensive loss:
Unrealized gain on securities ......................
Deferred tax expense on unrealized gain ....
Net income ......................................................
118
141
(32)
8
1
1
-
-
468
(1)
(205)
39
915
1,247
469
-
(205)
39
915
1,247
(39,905)
162
(66)
4,583
162
(66)
(39,905)
4,583
Balance at December 31, 2014 ..........................
22,809
228
103,756
(29)
(51,566)
52,389
Issuance of unrestricted stock .........................
Shares surrendered by employees to
pay taxes related to unrestricted stock .........
Issuance of common stock under
employee stock purchase plan .....................
Reversal of reserve for uncertain tax
positions ......................................................
Stock-based compensation expense ................
Tax benefits from stock-based awards ............
Accumulated other comprehensive loss:
Unrealized loss on securities .......................
Deferred tax benefit on unrealized loss .......
Net income ......................................................
152
(36)
11
1
-
-
(1)
(156)
40
(1,914)
689
554
-
(156)
40
(1,914)
689
554
(53)
18
4,614
(53)
18
4,614
Balance at December 31, 2015 ..........................
22,936
$229
$102,968
($64)
($46,952)
$56,181
The accompanying notes are an integral part of the consolidated financial statements.
44
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
We are a leading provider of software and services to the biometrics industry. Our software products are used
in government and commercial biometrics systems, which are capable of determining or verifying an
individual’s identity. We also offer engineering services related to software customization, integration, and
installation, as well as complete systems development. We sell our biometrics software products and services
globally through systems integrators, OEMs, and directly to end user customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Aware, Inc. and its
subsidiary (“the Company”). All significant intercompany transactions have been eliminated.
Use of Estimates – The preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during the reporting period. The
most significant estimates included in the financial statements pertain to revenue recognition, reserves for
doubtful accounts, useful lives of fixed assets, valuation allowance for deferred income tax assets, and accrued
liabilities. Actual results could differ from those estimates.
Fair Value Measurements - The Financial Accounting Standards Board (“FASB”) Codification defines fair
value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to the unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy under the FASB Codification are: i) Level 1 –
valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date; ii) Level 2 – valuations that are based on
quoted prices in markets that are not active or for which all significant inputs are observable, either directly or
indirectly; and iii) Level 3 – valuations that require inputs that are both significant to the fair value
measurement and unobservable.
Cash and cash equivalents, which primarily include money market mutual funds, were $51.2 million and $44.0
million as of December 31, 2015 and December 31, 2014, respectively. We classified our cash equivalents of
$43.0 million and $34.3 million as of December 31, 2015 and 2014, respectively, within Level 1 of the fair
value hierarchy because they are valued using quoted market prices.
Our investments, which consist of high yield corporate debt securities, are also classified within Level 1 of the
fair value hierarchy because they are valued using quoted market prices. Debt securities with maturities
greater than one year are classified as long term assets. We categorize our investments as available-for-sale
securities, and carry them at fair value in our financial statements. We had $0.9 million and $1.4 million of
available-for-sale investments as of December 31, 2015 and December 31, 2014, respectively.
As of December 31, 2015, our assets that are measured at fair value on a recurring basis and whose carrying
values approximate their respective fair values include the following (in thousands):
Fair Value Measurement at December 31, 2015 Using:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Corporate debt securities .............
Money market funds (included
in cash and cash equivalents) ......
Total ........................................
$869
43,027
$43,896
45
$-
$-
$-
$-
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2014, our assets that are measured at fair value on a recurring basis and whose carrying
values approximate their respective fair values include the following (in thousands):
Fair Value Measurement at December 31, 2014 Using:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Corporate debt securities .............
Money market funds (included
in cash and cash equivalents) ......
Total ........................................
$1,428
34,339
$35,767
$-
$-
$-
$-
Cash and Cash Equivalents – Cash and cash equivalents, which consist primarily of money market funds and
demand deposits, are stated at fair value. All highly liquid investments purchased with an original maturity of
three months or less are considered cash equivalents. Our cash balances exceed the Federal Deposit Insurance
Corporation limits. The Company does not believe it is exposed to significant credit risk related to cash and
cash equivalents.
Investments - At December 31, 2015 and 2014, we categorized all investment securities as available-for-sale,
since we may liquidate these investments currently. In calculating realized gains and losses, cost is
determined using specific identification. Unrealized gains and losses on available-for-sale securities are
excluded from earnings and reported in a separate component of stockholders’ equity called Accumulated
Comprehensive Income.
Realized gains on investments were $12,000 and $23,000 in the years ended December 31, 2015 and 2013,
respectively. Realized losses on investments were $59,000 in the year ended December 31, 2014.
Unrealized losses on investments were $53,000 and $156,000 in the years ended December 31, 2015, and
2013. Unrealized gains on investments were $162,000 in the year ended December 31, 2014.
The amortized cost of our corporate debt securities was $1.0 million at December 31, 2015. Corporate debt
securities comprising investments mature in 2017 and 2018.
Allowance for Doubtful Accounts – Accounts are charged to the allowance for doubtful accounts as they are
deemed uncollectible based on a periodic review of the accounts.
Inventories – Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-
in, first-out (“FIFO”) method. We evaluate all inventories for net realizable value on a quarterly basis, and
record provisions for excess and obsolete inventory when required. We had no inventory or reserve for excess
and obsolete inventory as of December 31, 2015.
Property and Equipment – Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is provided using the straight-line method over the estimated useful lives of the assets.
Upon retirement or sale, the costs of the assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss on disposal is included in the determination of
income or loss. Expenditures for repairs and maintenance are charged to expense as incurred.
The estimated useful lives of assets used by us are:
Building ............................................................................... 30 years
Building improvements ........................................................ 5 to 20 years
Furniture and fixtures ........................................................... 5 years
Computer, office & manufacturing equipment .................... 3 years
Purchased software .............................................................. 3 years
Impairment of Long-Lived Assets – We review long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that
46
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of
the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the
related carrying value of those assets to determine if the assets are impaired. If an impairment is indicated, the
asset is written down to its estimated fair value. The cash flow estimates used to identify the potential
impairment reflect our best estimates using appropriate assumptions and projections at that time. We believe
that no significant impairment of our long-lived assets has occurred as of December 31, 2015 and 2014.
Revenue Recognition – We recognize revenue when there is persuasive evidence of an arrangement, the sales
price is fixed or determinable, collection of the related receivable is reasonably assured, and delivery has
occurred or services have been rendered.
Persuasive evidence of an arrangement: We use contracts signed by both the customer and us or written
purchase orders issued by the customer as evidence of an arrangement.
Product delivery: We deem delivery to have occurred: (i) upon shipment when products are shipped FOB
shipping point, or (ii) upon delivery at a customer’s location when products are shipped FOB destination, or
(iii) when software is delivered electronically. If customer acceptance provisions apply, revenue is not
recognized until delivery has occurred and we have received such acceptance. If we are required to provide
installation services, revenue is not recognized until installation is complete.
Fixed or determinable fee: We consider fees to be fixed or determinable if the fee is not subject to refund
or adjustment and the payment terms are within normal established practices. If the fee is not fixed or
determinable, we recognize the revenue as amounts become due and payable.
Collection is deemed probable: We conduct a credit review for significant transactions at the time of the
arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if we expect
that the customer will pay amounts under the arrangement as payments become due.
We categorize revenue as software licenses, software maintenance, services, hardware, or royalties. In addition
to the general revenue recognition policies described above, specific revenue recognition policies apply to
each category of revenue.
Software licenses
Software licenses consist of revenue from the sale of software licenses for biometrics and imaging
applications. Our software licenses typically provide customers with the right to use our software in
perpetuity. We recognize revenue from software licenses upon delivery when licenses are sold in single
element arrangements, because we have no post-delivery obligations, including contractual or implied Post
Contract Support (“PCS”).
Software maintenance
Software maintenance consists of revenue from the sale of software maintenance contracts for biometrics and
imaging software. Software maintenance contracts entitle customers to receive software support and software
updates, if and when they become available, during the term of the maintenance contract. We recognize
software maintenance revenue ratably over the related contract period.
Services
Service revenue consists of fees from biometrics customers for software engineering services we provide to
them. We recognize services revenue as services are delivered when services are sold in single element
arrangements.
Hardware
Hardware revenue consists of sales of biometrics equipment to a single U.S. government customer. We
recognize hardware revenue upon delivery and acceptance of the equipment by the customer.
47
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Royalties
Royalties consist primarily of royalty payments we receive under DSL silicon contracts with two customers
that incorporate our silicon intellectual property (“IP”) in their DSL chipsets. We sold the assets of our DSL
IP business in 2009, but we continue to receive royalty payments from these customers. Royalties are reported
in continuing operations in accordance with ASC 205, Reporting Discontinued Operations, because we have
continuing ongoing cash flows from this business.
Since we cannot reasonably estimate royalty revenue, such revenue is recognized in the quarter in which a
final report is received from a customer. Royalty reports are typically received in the quarter immediately
following the quarter in which sales of royalty-bearing products occur.
Multiple element arrangements with software and software related elements
In addition to selling software licenses, software maintenance and software services in single element
arrangements, we also sell these three products as part of multiple element arrangements. We apply the
provisions of ASC 985-605, Software Revenue Recognition, to these arrangements because all the elements
are software or software related. The various combinations of multiple element arrangements and our revenue
recognition for each are described as follows:
Software licenses and software maintenance. When software licenses and software maintenance
contracts are sold together, we recognize software license revenue upon delivery, provided we have
vendor specific objective evidence (“VSOE”) for the fair value of the maintenance contract fee, and
we recognize the fair value of maintenance contract revenue ratably over the related contract period.
Under ASC 985-605, the residual method is the appropriate manner in which to allocate arrangement
consideration to the license when VSOE exists for all undelivered elements (e.g., PCS), but not for
the delivered element (e.g., the license). When we do not have VSOE for PCS, we recognize the
entire arrangement fee over the contractual PCS period. As a result of not having VSOE for PCS in
one arrangement in 2015, we deferred $3.6 million of license revenue at December 31, 2015 under
this policy.
Software licenses and services. When software licenses and software engineering services are sold
together, the total fee is generally recognized by applying contract accounting. We have adopted the
percentage-of-completion method of contract accounting, and we generally use an input method (i.e.,
labor hours) to determine our completion percentage. The software license portion of the arrangement
is classified as software license revenue and the engineering services portion is classified as services
revenue in our consolidated statements of income and comprehensive income.
Software licenses, software maintenance and services. When we sell software licenses, software
maintenance and software services together, revenue is recognized as follows: i) software
maintenance revenue is separated from the other two elements and is recognized ratably over the
related software maintenance contract period; provided we have VSOE for the fair value of the
maintenance element; and ii) the total fee from the software license and engineering service elements
is recognized by applying the contract accounting method described in the previous paragraph.
Multiple element arrangement with hardware and software elements
We also have a multiple element arrangement with one customer that involves the delivery of hardware,
software maintenance, and software services. We determined that these elements qualified as separate units of
accounting under ASC 605, Revenue Recognition, because they have value to the customer on a standalone
basis. We recognize revenue from this arrangement as follows: i) hardware revenue is recognized upon
delivery and acceptance of the equipment by the customer; ii) maintenance revenue is recognized ratably over
the related contract period; and iii) service revenue is recognized as services are delivered.
Income Taxes – We compute deferred income taxes based on the differences between the financial statement
and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are
expected to reverse. We establish a valuation allowance to offset temporary deductible differences, net
operating loss carryforwards and tax credits when it is more likely than not that the deferred tax assets will not
be realized.
48
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax
position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax
position. The evaluation of an uncertain tax position is based on factors that include, but are not limited to,
changes in the tax law, the measurement of tax positions taken or expected to be taken in tax returns, the
effective settlement of matters subject to audit, and changes in facts or circumstances related to a tax position.
Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could
impact our tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax
benefits would be classified as a provision for income tax in the statement of income.
Capitalization of Software Costs – We capitalize certain internally developed software development costs
after technological feasibility of the product has been established. No software costs were capitalized for the
years ended December 31, 2015, 2014 and 2013, because such costs incurred subsequent to the establishment
of technological feasibility, but prior to commercial availability, were immaterial.
Research and Development Costs – Costs incurred in the research and development of our products are
expensed as incurred.
Concentration of Credit Risk – At December 31, 2015 and 2014, we had cash and cash equivalents, in excess
of federally insured deposit limits of approximately $51.0 million and $43.7 million, respectively.
Concentration of credit risk with respect to net accounts receivable consisted of amounts owed by the
following customers that comprised more than 10% of net accounts receivable at December 31:
Customer A ...................................................
Customer B ...................................................
Customer C ...................................................
Customer D ...................................................
26%
17%
-%
4%
18%
-%
15%
11%
2015
2014
Concentration of credit risk with respect to our investment portfolio consisted of $0.5 million and $0.4 million
with two issuers of corporate debt securities, respectively, at December 31, 2015, and $0.5 million, $0.5
million, and $0.4 million with three issuers of corporate debt securities, respectively, at December 31, 2014.
Stock-Based Compensation – We grant stock and stock options to our employees and directors. We measure
stock-based compensation cost at the grant date based on the fair value of the award and recognize stock-based
compensation expense on a straight-line basis over the requisite service period of the award.
For stock awards, we determine the fair value of the award by using the fair market value of our stock on the
date of grant; provided the number of shares in the grant is fixed on the grant date.
For stock options, we use the Black-Scholes option valuation model to estimate the fair value of the award.
This valuation model takes into account the exercise price of the award, as well as a variety of significant
assumptions. The assumptions used to estimate the fair value of stock options include the expected term, the
expected volatility of our stock over the expected term, the risk-free interest rate over the expected term, and
our expected annual dividend yield.
Computation of Earnings per Share – Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing income available to common shareholders by the weighted average number of
common shares outstanding plus additional common shares that would have been outstanding if dilutive
potential common shares had been issued. For the purposes of this calculation, stock options are considered
common stock equivalents in periods in which they have a dilutive effect. Stock options that are antidilutive
are excluded from the calculation.
Fair Value of Financial Instruments – The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature.
49
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amount of investments is based on the fair value of the individual securities in our investment
portfolio.
Advertising Costs – Advertising costs are expensed as incurred and were not material for 2015, 2014, and
2013.
Recent Accounting Pronouncements – In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606). The ASU is the result of a joint project by the FASB and the
International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to
develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that
would: remove inconsistencies and weaknesses, provide a more robust framework for addressing revenue
issues, improve comparability of revenue recognition practices across entities, jurisdictions, industries, and
capital markets, improve disclosure requirements and resulting financial statements, and simplify the
presentation of financial statements. The core principle of the new guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is
effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. On
July 9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year, but to permit
entities to choose to adopt the standard as of the original effective date. We are currently evaluating the effect
that the updated standard will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued Accounting Standard Update ("ASU") 2015-17, "Balance Sheet
Classification of Deferred Taxes," which requires that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position to simplify the presentation of deferred income taxes.
The standard is effective prospectively for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017, with early adoption permitted. The Company did not early adopt this
standard. The effect of early adoption would not have been material as it would have only resulted in a
$184,000 reclass of short term deferred tax assets to long term deferred tax assets on our December 31, 2015
consolidated balance sheets.
With the exception of the two standards above, there have been no other recently issued accounting
pronouncements that are of significance or potential significance to us that we have not adopted as of
December 31, 2015.
Reclassifications - Certain prior period amounts on our consolidated balance sheets were reclassified to be
consistent with the current period presentation. Specifically, $2,000 of inventory at December 31, 2014 was
included in prepaid expenses and other current assets, and certain accrued expense line items at December 31,
2014 were condensed into one accrued expenses line item.
Segments – We organize ourselves into a single segment reporting to the chief operating decision makers. We
have sales outside of the United States, which are described in Note 9. All long-lived assets are maintained in
the United States.
3. PATENT RELATED INCOME
The composition of patent related income in 2015, 2014 and 2013 was as follows:
Year ended December 31, 2015. We had a $43,000 gain on the sale of patent assets in 2015, which is described
below:
We sold a portion of our patent portfolio pertaining to home networking technology to an unrelated third
party for $50,000. The proceeds from the sale were reduced by $7,000 of transaction costs, which consisted
primarily of fees from the law firm that assisted us in the sale. We recorded a gain of $43,000 on the sale.
50
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2014. We had a $2.1 million gain on the sale of patent assets in 2014, which is
described below:
We sold a portion of our patent portfolio pertaining to DSL diagnostic technology to an unrelated third party
for $2.6 million. The proceeds from the sale were reduced by $0.5 million of transaction costs, which
consisted primarily of fees from the law firm that assisted us in the sale. We recorded a gain of $2.1 million
on the sale.
The DSL diagnostic technology in the patents we sold in 2014 was related to our DSL Service Assurance
business that we shut down in 2012 and 2013 and reported in discontinued operations in those periods. We
do not consider our patent related activities to be a component of the operating business from which the
underlying technology was derived, but rather as a component of corporate general and administrative
expenses. Accordingly the gain on the sale of these patents was reported in income from continuing
operations.
The gains on the sale of patents was included in income from continuing operations pursuant to ASC 360-
10, Impairment or Disposal of Long-Lived Assets, and Rule 5-03 of Regulation S-X.
Year ended December 31, 2013. We had $0.8 million of income from a patent arrangement in 2013, which is
described below:
We entered into an arrangement with an unaffiliated third party in 2010 under which we assigned certain
patents in return for royalties on proceeds from patent monetization efforts by the third party. Such third
party has engaged in various patent monetization activities, including enforcement, litigation and licensing.
The party reported and we recorded $0.8 million of income from this arrangement in the year ended
December 31, 2013.
We continue to have a contractual relationship with this third party. However, we are unable to predict how
much more income we might receive from this arrangement, if any, because:
The claims in one of the patents we assigned were rejected by the United States Patent Office
(“USPTO”) in May 2013. The USPTO’s Patent Trial & Appeal Board (“PTAB”) affirmed the USPTO
decision in June 2014. The PTAB decision was appealed to the Federal Circuit. In December 2014,
the Federal Circuit remanded the appeal back to the PTAB for further consideration. In August 2015,
the PTAB remanded the case back to the USPTO patent examiner of record for further review. In
November 2015, the USPTO confirmed the validity of the claims in the patent.
Even though the USPTO has confirmed the validity of the claims in the patent, we do not know
whether any patent monetization efforts by the third party will be successful.
4. DISCONTINUED OPERATIONS
Our board of directors approved the shutdown of our DSL service assurance software product line in 2013. This
product line was previously a component of our DSL Service Assurance Segment. Results from the DSL
Service Assurance Segment have been reported as discontinued operations because we no longer have any
significant continuing involvement with, or cash flows from, this segment.
Loss from the discontinued DSL Service Assurance Segment was (in thousands):
Years ended December 31,
2014
2015
2013
Revenue .......................................................................
Expenses .....................................................................
Loss before income taxes .........................................
Income tax benefit ......................................................
Loss from discontinued operations ..........................
$-
-
-
-
$-
$-
-
-
-
$-
$3,216
5,120
(1,904)
(748)
($1,156)
51
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2013, we incurred one-time shutdown costs related to the software product line of approximately $2.9
million. Such costs comprise: i) $3.7 million of payments to customers to terminate contracts, which were offset
by $1.2 million of deferred revenue obligations that were relieved as a result of such contract terminations; ii)
$0.3 million of severance and employee-related costs; and iii) $48,000 of asset write-offs. All such costs were
incurred and included in loss from discontinued operations for the year ended December 31, 2013. All DSL
service assurance software product line exit costs were paid in 2013, with the exception of $0.1 million of
severance costs, which were paid in early January 2014.
There were no assets or liabilities remaining on the balance sheet as of December 31, 2015 related to the DSL
Service Assurance Segment.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in thousands):
2015
2014
Land .....................................................................................
Building and improvements .................................................
Computer equipment ............................................................
Purchased software ..............................................................
Furniture and fixtures ...........................................................
Office equipment .................................................................
Total ..................................................................................
Less accumulated depreciation and amortization .................
Property and equipment, net .............................................
$1,056
9,060
626
83
778
166
11,769
(6,792)
$4,977
$1,056
9,060
614
78
778
191
11,777
(6,488)
$5,289
Depreciation expense was $0.4 million, $0.4 million, and $0.5 million for the years ended December 31,
2015, 2014, and 2013, respectively. In 2015, 2014 and 2013, we identified $0.1 million, $0.1 million, and
$0.3 million of assets no longer in use and retired the assets and related accumulated depreciation.
6. INCOME TAXES
We recorded a benefit from income taxes of $0.5 million in the year ended December 31, 2015, all of which
was included in continuing operations. We made provisions for income taxes related to continuing operations
in the years ended December 31, 2014 and 2013 of $2.7 million and $1.9 million, respectively. The
components of the provision for income taxes are as follows (in thousands):
Current:
Federal ........................................................
State .............................................................
Deferred:
Federal ........................................................
State .............................................................
Year ended December 31,
2014
2013
2015
($807)
280
(527)
(16)
7
(9)
$1,976
589
2,565
93
14
107
$1,000
273
1,273
471
173
644
Provision for (benefit from) income taxes .......
($536)
$2,672
$1,917
52
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
Federal statutory rate .............................................................
State rate, net of federal benefit .............................................
Tax credits .............................................................................
Permanent adjustments .........................................................
Reversal of reserve ...............................................................
Other .....................................................................................
Prior year adjustment ............................................................
Effective tax rate .................................................................
Year ended December 31,
2014
34%
5
(1)
(1)
-
-
-
37%
2015
34%
5
(4)
(2)
(47)
1
-
(13%)
2013
34%
5
(2)
(1)
-
-
(2)
34%
We recorded a benefit from income taxes of $0.5 million for the year ended December 31, 2015, all of which
was included in continuing operations. The benefit from income taxes was the result of a $1.9 million tax
benefit from the reversal of a reserve for uncertain tax positions, which was partially offset by $1.4 million of
income taxes on pre-tax income based on the U.S. statutory rate of 34%, increased by state income taxes, and
reduced by research tax credits and permanent adjustments.
As previously reported, the Internal Revenue Service (“IRS”) commenced an examination of our tax return for
the year ended December 31, 2012 in September 2014. In July 2015, the IRS notified us that it had completed
its examination and that it had no changes to our reported tax. As a result of the completion of the IRS
examination, we determined that the $1.9 million reserve for uncertain tax positions we had established on
federal research and development credits in 2012 was no longer required. We reversed the reserve in 2015.
Total income tax expense for the year ended December 31, 2014 was $2.7 million, all of which was included
in continuing operations. Income tax expense for 2014 was based on the U.S. statutory rate of 34%, increased
by state income taxes, and reduced by Federal research tax credits and permanent adjustments.
Total income tax expense for the year ended December 31, 2013 was $1.2 million, including $1.9 million of
tax expense that was recorded in continuing operations less a tax benefit of $0.7 million that was recorded in
discontinued operations. Income tax expense for 2013 was based on the U.S. statutory rate of 34%, increased
by state income taxes, and reduced by Federal research tax credits and permanent adjustments. Tax expense in
2013 also reflects two items related to 2012, including: i) a tax benefit of $0.1 million related to the 2012
research tax credit. This credit was extended retroactively back to January 1, 2012, by the American Taxpayer
Relief Act of 2012, which was enacted on January 2, 2013; and ii) a tax benefit of $0.1 million related to a
reduction in the estimate of the 2012 tax expense recorded in our 2012 financial statements.
As of December 31, 2015 and 2014, we had deferred tax assets for which we had recorded no valuation
allowance. The principal components of deferred tax assets were as follows at December 31 (in thousands):
Depreciation ...................................................................................
Stock compensation .......................................................................
Capitalized research and development costs .................................
Other ..............................................................................................
Total.............................................................................................
Less valuation allowance ................................................................
Deferred tax assets, net ................................................................
$394
256
39
310
999
(-)
$999
$374
303
96
199
972
(-)
$ 972
2015
2014
We will continue to assess the level of valuation allowance required in future periods. Should evidence
regarding the realizability of tax assets change at a future point in time, the valuation allowance will be
adjusted accordingly.
53
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A rollforward of the uncertain tax position related to our research and development tax credits is as follows (in
thousands):
Uncertain tax positions at December 31, 2012 .......
Increase due to positions taken in prior periods .....
Uncertain tax positions at December 31, 2013 .......
Increase due to positions taken in prior periods .....
Uncertain tax positions at December 31, 2014 .......
Decrease due to completion of IRS examination ....
Uncertain tax positions at December 31, 2015 .......
$2,945
-
2,945
-
2,945
(1,913)
$1,032
Uncertain tax positions of $0.7 million will impact our tax rate if realized. The difference between this
amount and the total uncertain tax positions in the table above is the federal tax effect on state tax credits.
In addition to deferred tax assets carried on our balance sheet, we also had net federal and state research and
development credit carryforwards available at December 31, 2015 of $5.5 million and $0.1 million. These
credits were not recorded as tax assets as they relate to excess stock compensation deductions that may not be
recorded as tax assets under generally accepted accounting principles until the amounts have been utilized to
reduce our tax liability. To the extent that these assets are used to reduce future taxes, the benefit will be
recorded as a reduction to additional paid-in capital. In 2015, 2014 and 2013, we recorded tax benefits of $0.6
million, $1.2 million, and $0.1 million, respectively, to equity related to the use of these tax credits to reduce
our tax liability.
Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As
of December 31, 2015, we had no accrued interest or penalties related to uncertain tax positions.
The tax years from 2013 through 2015 are subject to examination by the IRS and the tax years 2000 through
2015 are subject to examination by state tax authorities.
7. EQUITY AND STOCK COMPENSATION PLANS
Fixed Stock Option Plan – We have one active fixed stock option plan which is our 2001 Nonqualified Stock
Plan (“2001 Plan”). We are authorized to grant nonqualified stock options, stock appreciation rights and stock
awards to our employees and directors for up to 8,000,000 shares of common stock under this plan. As of
December 31, 2015, there were 4,966,715 shares available for grant under the 2001 Plan.
Options are granted at exercise prices as determined by the Board of Directors and have terms ranging from
four to a maximum of ten years. Options generally vest over three to five years.
The following table presents stock-based employee compensation expenses included in our consolidated
statements of income and comprehensive income (in thousands):
Cost of services
Research and development
Selling and marketing
General and administrative
Stock-based compensation expense
Years ended December 31,
2015
$28
89
13
559
$689
2014
$44
106
17
748
$915
2013
$34
81
14
533
$662
Stock-based compensation expense in the preceding table includes expenses associated with grants of: i) stock
options; and iii) unrestricted shares of our common stock. The methods used to determine stock-based
compensation expense for each type of equity grant are described in the following paragraphs.
54
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Grants. We did not grant any stock options in the years ended December 31, 2015, 2014 and
2013. When we grant stock options we estimate the fair value of those stock options using the Black-Scholes
valuation model. The Black-Scholes valuation model takes into account the exercise price of the award, as
well as a variety of significant assumptions. The assumptions used to estimate the fair value of stock options
include the expected term, the expected volatility of our stock over the expected term, the risk-free interest rate
over the expected term, and our expected annual dividend yield. We do not estimate our forfeiture rates as the
actual forfeiture rate is known at the end of each reporting period due to the timing of our stock option vesting.
Unrestricted Stock Grants. Our 2001 Plan permits us to grant shares of unrestricted stock to our directors,
officers, and employees. Stock-based compensation expense for stock grants is determined based on the fair
market value of our stock on the date of grant; provided the number of shares in the grant is fixed on the grant
date. We granted 152,000, 152,000, and 130,000 shares of unrestricted stock during the years ended December
31, 2015, 2014, and 2013, respectively.
The accounting treatment of unrestricted stock awards in 2015, 2014 and 2013 is described below:
Year ended December 31, 2015. In March 2015, we granted 152,000 shares of unrestricted stock to
directors, officers and employees. The shares were issued in two equal installments shortly after June 30,
2015 and December 31, 2015. We expensed $682,000 of stock-based compensation expense related to this
grant in the year ended December 31, 2015. There was no unamortized stock-based compensation charge
associated with this stock grant as of December 31, 2015.
We issued shares of common stock related to the March 2015 grant as follows: i) 58,862 net shares of
common stock were issued in early July 2015 after employees surrendered 17,138 shares for which we paid
$69,000 of withholding taxes on their behalf; and ii) 57,151 shares of common stock were issued in early
January 2016 after employees surrendered 18,849 shares for which we paid $61,000 of withholding taxes
on their behalf.
Year ended December 31, 2014. In March 2014, we granted 152,000 shares of unrestricted stock to
directors, officers and employees. The shares were issued in two equal installments shortly after June 30,
2014 and December 31, 2014. We expensed $876,000 of stock-based compensation expense related to this
grant in the year ended December 31, 2014. There was no unamortized stock-based compensation charge
associated with this stock grant as of December 31, 2014.
We issued shares of common stock related to the March 2014 grant as follows: i) 58,769 net shares of
common stock were issued in early July 2014 after employees surrendered 17,231 shares for which we paid
$113,000 of withholding taxes on their behalf; and ii) 56,804 shares of common stock were issued in early
January 2015 after employees surrendered 19,196 shares for which we paid $87,000 of withholding taxes
on their behalf.
Year ended December 31, 2013. In April 2013, we granted 130,000 shares of unrestricted stock to directors,
officers and employees. The shares were issued in two equal installments shortly after June 30, 2013 and
December 31, 2013. We expensed $623,000 of stock-based compensation expense related to this grant in
the year ended December 31, 2013. There was no unamortized stock-based compensation charge associated
with this stock grant as of December 31, 2013.
We issued shares of common stock related to the April 2013 grant as follows: i) 51,374 net shares of
common stock were issued in early July 2013 after employees surrendered 13,626 shares for which we paid
$71,000 of withholding taxes on their behalf; and ii) 49,936 net shares of common stock were issued in
early January 2014 after employees surrendered 15,064 shares for which we paid $92,000 of withholding
taxes on their behalf.
55
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option transactions for our fixed stock option plan for the years ended December 31, 2015,
2014, and 2013 are presented below:
2015
2014
2013
Weighted
Average
Exercise
Price
$4.71
-
-
6.18
$ 4.37
Shares
106,202
-
-
(20,000)
86,202
Weighted
Average
Exercise
Price
$5.68
-
3.98
6.07
$4.71
Weighted
Average
Exercise
Price
$5.63
-
4.27
4.83
$5.68
Shares
1,063,025
-
(6,163)
(51,873)
1,004,989
Shares
1,004,989
-
(117,783)
(781,004)
106,202
Outstanding at beginning of year ...
Granted ..........................................
Exercised ........................................
Forfeited or cancelled ....................
Outstanding at end of year .............
Exercisable at year end ..................
86,202
$4.37
104,117
$4.69
986,237
$5.70
Total options outstanding at December 31, 2015 were 86,202. All of those options were vested and had a
weighted average exercise price of $4.37.
No stock options were granted in the years ended December 31, 2015, 2014 and 2013. No options were
exercised in the year ended December 31, 2015.
At December 31, 2015, the weighted average remaining contractual term for total options outstanding and total
options exercisable was approximately 2.1 years for each.
At December 31, 2015, the aggregate intrinsic value of options outstanding and options exercisable was
$14,000 for each. The intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option.
The following table summarizes the stock options outstanding at December 31, 2015:
Exercise Price
Range
$2 to $3
$3 to $4
$4 to $5
$6 to $7
Options Outstanding
Options Exercisable
Weighted
Average
Exercise
Price
$2.52
3.57
4.64
6.10
$4.37
Weighted Average
Remaining
Contractual
Term (in years)
3.39
1.82
1.93
1.36
2.08
Number
18,000
14,168
33,200
20,834
86,202
Weighted
Average
Exercise
Price
Number
18,000
14,168
33,200
20,834
86,202
$2.52
3.57
4.64
6.10
$4.37
At December 31, 2015, there was no unrecognized compensation expense related to non-vested stock options
as there were no non-vested stock options.
We issue common stock from previously authorized but unissued shares to satisfy option exercises and
purchases under our Employee Stock Purchase Plan.
Employee Stock Purchase Plan - In June 1996, we adopted an Employee Stock Purchase Plan (the “ESPP
Plan”) under which eligible employees could purchase common stock at a price equal to 85% of the lower of
the fair market value of the common stock at the beginning or end of each six-month offering period. On
November 29, 2005 we amended the ESPP Plan to provide that eligible employees may purchase common
stock at a price equal to 95% of the fair market value of the common stock as of the end of each six-month
offering period. There is no stock-based compensation expense related to our Employee Stock Purchase Plan
because it is not considered a compensatory plan. The plan does not have a look-back feature, and has a
minimal discount of 5% of the fair market value of the common stock as of the end of each six-month offering
period. Participation in the ESPP Plan is limited to 6% of an employee’s compensation, may be terminated at
56
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
any time by the employee and automatically ends on termination of employment. A total of 350,000 shares of
common stock have been reserved for issuance. As of December 31, 2015 there were 89,376 shares available
for future issuance under the ESPP Plan. We issued 11,561, 8,022, and 7,196 common shares under the ESPP
Plan in 2015, 2014, and 2013, respectively.
Dividends – We did not pay dividends in the years ended December 31, 2015 and 2013. In the year ended
December 31, 2014, our board of directors declared a special cash dividend of $1.75 per share. The dividend
was paid on July 24, 2014 to shareholders of record as of July 10, 2014. The total dividend payment was
$39.9 million.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments – We own our principal office and research facility in Bedford, Massachusetts, which we
have occupied since November 1997. We have no real estate lease commitments and de minimis equipment
lease commitments.
Litigation - There are no material pending legal proceedings to which we are a party or to which any of our
properties are subject which, either individually or in the aggregate, are expected to have a material adverse
effect on our business, financial position or results of operations.
Guarantees and Indemnification Obligations – We enter into agreements in the ordinary course of business
that require us: i) to perform under the terms of the contracts, ii) to protect the confidentiality of our
customers’ intellectual property, and iii) to indemnify customers, including indemnification against third party
claims alleging infringement of intellectual property rights. We also have agreements with each of our
directors and executive officers to indemnify such directors or executive officers, to the extent legally
permissible, against all liabilities reasonably incurred in connection with any action in which such individual
may be involved by reason of such individual being or having been a director or officer of the Company.
Given the nature of the above obligations and agreements, we are unable to make a reasonable estimate of the
maximum potential amount that we could be required to pay. Historically, we have not made any significant
payments on the above guarantees and indemnifications and no amount has been accrued in the accompanying
consolidated financial statements with respect to these guarantees and indemnifications.
9. BUSINESS SEGMENTS AND MAJOR CUSTOMERS
We organize ourselves into a single segment that reports to the chief operating decision makers.
We conduct our operations in the United States and sell our products and services to domestic and international
customers. Revenues were generated from the following geographic regions (in thousands):
United States .......................................................
Brazil ..................................................................
Rest of world ......................................................
Revenue by product group was (in thousands):
Biometrics ..........................................................
Imaging ...............................................................
DSL royalties ......................................................
Year ended December 31,
2015
$11,737
2,163
5,721
$19,621
2014
$18,168
848
4,704
$23,720
Year ended December 31,
2015
$16,916
2,301
404
$19,621
57
2014
$21,436
1,558
726
$23,720
2013
$13,909
231
5,217
$19,357
2013
$17,085
1,352
920
$19,357
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The portion of total revenue that was derived from major customers was as follows:
Customer A ...................................................
Customer B ...................................................
Customer C ...................................................
Year ended December 31,
2015
10%
9%
3%
2014
2%
24%
10%
2013
-%
21%
3%
10. EMPLOYEE BENEFIT PLAN
In 1994, we established a qualified 401(k) Retirement Plan (the “Plan”) under which employees are allowed to
contribute certain percentages of their pay, up to the maximum allowed under Section 401(k) of the Internal
Revenue Code. Our contributions to the Plan are at the discretion of the Board of Directors. Our
contributions were approximately $216,000, $198,000, and $189,000 in 2015, 2014 and 2013, respectively.
11. NET INCOME PER SHARE
Net income per share is calculated as follows (in thousands, except per share data):
Net income:
Income from continuing operations ........................................
Loss from discontinued operations ..........................................
Net income ........................................................................
Shares outstanding:
Weighted-average common shares outstanding ......................
Additional dilutive common stock equivalents .......................
Diluted shares outstanding .....................................................
Basic net income per share:
Basic net income per share from continuing operations .........
Basic net loss per share from discontinued operations ...........
Basic net income per share ...............................................
Diluted net income per share:
Diluted net income per share from continuing operations ......
Diluted net loss per share from discontinued operations ........
Diluted net income per share .............................................
Year ended December 31,
2015
2014
2013
$4,614
-
$4,614
22,899
66
22,965
$0.20
-
$0.20
$0.20
-
$0.20
$4,583
-
$4,583
22,703
84
22,787
$0.20
-
$0.20
$0.20
-
$0.20
$3,752
(1,156)
$2,596
22,543
98
22,641
$0.17
(0.05)
$0.12
$0.16
(0.05)
$0.11
For the years ended December 31, 2015, 2014 and 2013, options to purchase 54,034, 40,834, and 823,338
shares of common stock at weighted average exercise prices of $5.20, $6.14, and $6.07 per share, respectively,
were outstanding, but were not included in the computation of diluted EPS because the options’ exercise
prices were greater than the average market price of the common shares and thus would be anti-dilutive.
58
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss and activity were as follows (in thousands):
December 31,
2014
Increase/
Decrease
Reclassification
Adjustments
December 31,
2015
Unrealized losses on available for sale securities .......................
Unrealized gains on available for sale securities ........................
Net unrealized gains (losses) on available for sale securities ...
Income tax benefit (expense) on other comprehensive loss ........
Total accumulated other comprehensive loss, net of taxes ......
($87)
43
(44)
15
($29)
($50)
(15)
(65)
22
($43)
$-
12
12 (a)
(4)
$8
($137)
40
(97)
33
($64)
(a) – Classified in other income (expense).
13. QUARTERLY RESULTS OF OPERATIONS – UNAUDITED
The following table is a summary of certain items in the consolidated statements of income and comprehensive
income for each of our quarters in the two-year period ended December 31, 2015 (in thousands, except per
share data).
March 31
June 30
September 30 December 31
2015 Quarters Ended
Revenue ................................................
Operating income .................................
Net income ..........................................
$4,123
384
272
Net income per share – basic ................
Net income per share – diluted ............
$0.01
$0.01
$4,510
477
319
$0.01
$0.01
$4,041
429
2,197
$0.10
$0.10
$6,946
2,625
1,826
$0.08
$0.08
March 31
June 30
September 30 December 31
2014 Quarters Ended
Revenue ................................................
Operating income .................................
Net income ..........................................
$6,617
1,311
880
Net income per share – basic ................
Net income per share – diluted ............
$0.04
$0.04
$6,767
1,382
865
$0.04
$0.04
$6,027
4,155
2,599
$0.11
$0.11
$4,309
243
239
$0.01
$0.01
Quarterly amounts may not sum to annual amounts due to rounding and dilution.
14. OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any arrangements with unconsolidated entities, such as entities often referred to as
structured finance, special purpose entities, or variable interest entities which are often established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Accordingly, we are not exposed to any financing, liquidity, market or credit risk if we had such relationships.
59
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts – Years ended December 31, 2015, 2014, and 2013
(in thousands)
Col. A
Col. B
Col. C(1)
Col. C(2)
Col. D
Col. E
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged
to Other
Accounts
Deductions
Charged to
Reserves
Balance
at End
of Period
Allowance for doubtful
accounts receivable:
2015 ...........................
2014 ...........................
2013 ...........................
Inventory reserves:
2015 ...........................
2014 ...........................
2013 ...........................
Warranty reserves:
2015 ...........................
2014 ...........................
2013 ...........................
Deferred tax asset
valuation allowance:
2015 ...........................
2014 ...........................
2013 ...........................
$20
$20
$20
$-
$-
$-
$-
$-
$10
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$10
$-
$-
$-
$20
$20
$20
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our co-chief executive officers and
chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based on this evaluation, our co-chief executive officers and chief financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this annual report.
Evaluation of Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our co-chief executive officers and
chief financial officer, we concluded that there were no changes in our internal control over financial reporting that
occurred during the quarterly period ended December 31, 2015 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13(a)-15(f) under the Exchange Act. Under the supervision and with the participation of our
management, including our principal co-executive officers and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. Based on our evaluation under the framework in Internal Control — Integrated Framework,
our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by RSM
US LLP, an independent registered public accounting firm, as stated in their audit report which is included herein.
ITEM 9B. OTHER INFORMATION
None.
61
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K is incorporated by reference from the information contained in
the sections captioned “Directors and Executive Officers”, “Corporate Governance” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement that will be delivered to our shareholders in connection
with our May 25, 2016 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in
the section captioned “Executive Compensation” in the Proxy Statement that will be delivered to our shareholders in
connection with our May 25, 2016 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in
the section captioned “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” in the Proxy Statement that will be delivered to our shareholders in connection with our May 25, 2016
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information, if any, required by Item 13 of Form 10-K is incorporated by reference from the information
contained in the sections captioned “Corporate Governance” and “Certain Relationships and Related
Transactions” in the Proxy Statement that will be delivered to our shareholders in connection with our May 25,
2016 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in
the section captioned “Independent Accountants” in the Proxy Statement that will be delivered to our shareholders
in connection with our May 25, 2016 Annual Meeting of Shareholders.
62
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as part of this report:
(a) Financial Statements and Exhibits:
(1) Consolidated Balance Sheets as of December 31, 2015 and 2014 ..............................
Consolidated Statements of Income and Comprehensive Income for each of the three
years in the period ended December 31, 2015 ..............................................................
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2015 .....................................................
Consolidated Statements of Stockholders’ Equity for each of
the three years in the period ended December 31, 2015 ..............................................
Notes to Consolidated Financial Statements .....................................................................
(2) Schedule II - Valuation and Qualifying Accounts ......................................................
(3) Exhibits:
The exhibits listed below are filed with or incorporated by reference in this report.
Page
41
42
43
44
45
60
Exhibit No.
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8
10.9*
Description of Exhibit
Amended and Restated Articles of Organization, as amended (filed as Exhibit 3.1 to the
Company’s Form 10-K for the year ended December 31, 2008 and incorporated herein
by reference).
Amended and Restated By-Laws (filed as Exhibit 3.1 to the Company’s Form 8-K filed
with the Securities and Exchange Commission on December 10, 2007 and incorporated
herein by reference).
1996 Employee Stock Purchase Plan, as amended and restated (filed as Exhibit 99.1 to
the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 29, 2005 and incorporated herein by reference).
Form of Indemnification Agreement for Directors and Officers of Aware, Inc. (filed as
Exhibit 10.1 to the Company's Form 8-K filed with the Securities and Exchange
Commission on February 22, 2011 and incorporated herein by reference).
2001 Nonqualified Stock Plan (filed as Exhibit 99(d)(4) to the Company’s Schedule TO
filed with the Securities and Exchange Commission on March 3, 2003 and incorporated
herein by reference).
Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan
for options granted to executive officers and directors prior to May 21, 2008 (filed as
Exhibit 10.6 to Company’s Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).
Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan
for options granted to executive officers and directors from and after May 21, 2008 (filed
as Exhibit 10.8 to Company’s Form 8-K on May 22, 2008 and incorporated herein by
reference)
Form of Unrestricted Stock Award for outside directors of Aware under the 2001
Nonqualified Stock Plan (filed as Exhibit 10.1 to Company's Form 8-K filed with the
Securities and Exchange Commission on July 28, 2010 and incorporated herein by
reference).
Form of Unrestricted Stock Award for officers of Aware under the 2001 Nonqualified
Stock Plan (filed as Exhibit 10.2 to Company's Form 8-K filed with the Securities and
Exchange Commission on July 28, 2010 and incorporated herein by reference).
Asset Purchase Agreement by and between Aware, Inc. and Lantiq Broadband Holdco,
Inc. and Lantiq Deutschland GmbH dated October 14, 2009 (filed as Exhibit 10.8 to
Company’s Form 10-K for the year ended December 31, 2009 and incorporated herein
by reference).
Form of Unrestricted Stock Award for executive officers and directors of Aware, Inc.
63
10.10*
21.1
23.1
31.1
31.2
32.1
101**
under the 2001 Nonqualified Plan (filed as Exhibit 10.1 to the Company’s Form 8-K
filed with the Securities and Exchange Commission on April 4, 2013 and incorporated
herein by reference).
Form of Change in Control Retention Agreement between Aware, Inc. and each of
Richard P. Moberg and Kevin T. Russell (filed as Exhibit 10.1 to the Company’s Form
8-K filed with the Securities and Exchange Commission on March 30, 2015 and
incorporated herein by reference).
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of co-Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
The following financial statements from Aware, Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting
Language), as follows: (i) Consolidated Balance Sheets as of December 31, 2015 and
December 31, 2014; (ii) Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 2015, December 31, 2014 and December 31, 2013;
(iii) Consolidated Statements of Cash Flows for the Years Ended December 31, 2015,
December 31, 2014 and December 31, 2013; (iv) Consolidated Statements of
Stockholders’ Equity for the Years Ended December 31, 2015, December 31, 2014 and
December 31, 2013; and (v) Notes to Consolidated Financial Statements.
*Management contract or compensatory plan.
**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto shall not be deemed
filed for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AWARE, INC.
General Counsel
By: /s/ Kevin T. Russell
Kevin T. Russell
co-Chief Executive Officer & co-President
By: /s/ Richard P. Moberg
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer (Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on the 12th day of February 2016.
Date: February 12, 2016
Signature
/s/ Kevin T. Russell
Kevin T. Russell
/s/ Richard P. Moberg
Richard P. Moberg
/s/ John S. Stafford, Jr.
John S. Stafford, Jr.
/s/ John S. Stafford, III
John S. Stafford, III
/s/ Adrian F. Kruse
Adrian F. Kruse
/s/ Brian D. Connolly
Brian D. Connolly
/s/ Brent P. Johnstone
Brent P. Johnstone
Title
co-Chief Executive Officer, co-President,
General Counsel & Director
(co-Principal Executive Officer)
co-Chief Executive Officer, co-President,
Chief Financial Officer & Director
(co-Principal Executive Officer)
(Principal Financial and Accounting Officer)
Chairman of the Board & Director
Director
Director
Director
Director
65
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Corporate Info rmat ion
BOARD OF DIRECTORS
John S. Stafford, Jr.
Chairman
Investor
John S. Stafford, III
Investor
Adrian F. Kruse, C.P.A., J.D.
Audit Partner (retired)
Ernst & Young LLP
Brent P. Johnstone
Managing Director
Quarry Capital Management, LLC
Brian D. Connolly
Portfolio Manager
Millstreet Capital Management, LLC
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer
Aware, Inc.
Kevin T. Russell
co-Chief Executive Officer & co-President
General Counsel
Aware, Inc.
LEGAL COUNSEL
Foley Hoag LLP
Boston, MA
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
RSM US LLP
Boston, MA
TRANSFER AGENT
Computershare Investor Services
PO Box 30170
College Station, TX 77842
(781) 575-2879
www.computershare.com/investor
ANNUAL MEETING
Wednesday, 10:00 a.m.
May 25, 2016
Aware, Inc.
Bedford, MA
STOCK LISTING
NASDAQ: AWRE
OFFICERS
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer
CORPORATE HEADQUARTERS
40 Middlesex Turnpike
Bedford, MA 01730
(781) 276-4000
Kevin T. Russell
co-Chief Executive Officer & co-President
General Counsel
CONTACT INFORMATION
Investor Relations
Aware, Inc.
40 Middlesex Turnpike
Bedford, MA 01730-1432 USA
(781) 276-4000
www.aware.com
2015 Annual Report
Aware, Inc., 40 Middlesex Turnpike, Bedford, MA 01730-1432 USA
T (781) 276-4000 | F (781) 276-4001 | www.aware.com