{"url_path":"/sec/awre/10-k/2026/item-1a","section_key":"item-1a","section_title":"Item 1A Risk Factors","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-03-06","source_url":"https://www.sec.gov/Archives/edgar/data/1015739/0001193125-26-096448-index.html","accession_number":"0001193125-26-096448","cik":"0001015739","ticker":"AWRE","issuer_name":"AWARE INC /MA/","edgar_url":"https://www.sec.gov/Archives/edgar/data/1015739/0001193125-26-096448-index.html","primary_entity_key":"0001015739","primary_entity_name":"AWARE INC /MA/"},"word_count":4983,"has_tables":true,"body_markdown":"ITEM 1A. Risk Factors\n\nOur operating results may fluctuate significantly from period-to-period and are difficult to predict.\n\nIndividual orders can represent a meaningful percentage of our revenues and operating results in any single period and the timing of the receipt of those orders is difficult to predict. The failure to close an order or the deferral or cancellation of an order can result in revenue and net income shortfalls for that quarter. We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs, including personnel-related costs, may be difficult to reduce in the near term. As a result, we may not be able to sufficiently reduce our costs in any quarter to adequately compensate for an unexpected near-term shortfall in revenues, and even a small shortfall could disproportionately and adversely affect our financial results for that quarter.\n\nOur financial results may be negatively affected by a number of factors as well, including the following:\n\n•\nany 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;\n\n•\nthe terms of customer contracts that affect the timing of revenue recognition;\n\n•\nthe size and timing of our receipt of customer orders;\n\n•\nsignificant fluctuations in demand for our products and services;\n\n•\nany loss of a key customer or one of its key customers;\n\n•\nnew competitors entering our markets, or the introduction of enhanced solutions from new or existing competitors;\n\n•\ncompetitive pressures on selling prices;\n\n•\nany cancellations, or delays of orders or contract amendments by government customers;\n\n•\nhigher than expected costs, asset write-offs, and other one-time financial charges; and\n\n•\ngeneral economic trends and other factors.\n\n•\nwrite-offs of investments in private companies;\n\nAs a result of these factors, we believe that period-to-period comparisons of our revenue levels and operating results are not necessarily meaningful. You should not rely on our quarterly or annual revenue and operating results to predict our future performance.\n\nWe 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.\n\nWe derive a significant portion of our revenue directly or indirectly from federal, international, state and local governments. We believe that the success and growth of our business will continue to depend on government customers purchasing our products and services either directly from us or indirectly through our channel partners. Changes in government contracting policies or government budgetary constraints may adversely affect our financial performance. Among the factors that could adversely affect our business are:\n\n•\nthe impact of changes in government priorities, budgetary constraints, continuing resolutions, or other actions that reduce or delay government spending;\n\n8\n\n \n\n•\nother changes in fiscal policies or decreases in available government funding,\n\n•\nchanges in government funding priorities;\n\n•\nchanges in government programs or applicable requirements;\n\n•\nthe adoption of new laws or regulations or changes to existing laws or regulations relating to the provision of biometrics services or the use of biometric data;\n\n•\nchanges in U.S. or foreign trade policies, tariffs, export controls, sanctions, or retaliatory measures;\n\n•\nchanges in political or social attitudes with respect to security and defense issues;\n\n•\nchanges in audit policies and procedures of government entities;\n\n•\npotential delays or changes in the government appropriations process; and\n\n•\ndelays in the payment of our invoices by government payment offices.\n\nThese 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.\n\nWe derive a significant portion of our revenue from third party channel partners.\n\nOur future results depend upon the continued successful distribution of our products through a channel of systems integrators and OEM partners. Systems integrators, including VARs, use our software products as a component of the biometrics systems they deliver to their customers. OEMs embed our software products in their technology devices or software products. These channel partners typically sell their products and services to government customers.\n\nOur 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:\n\n•\na reduction in sales efforts by our partners;\n\n•\nthe failure of our partners to win awards in which our products are used;\n\n•\na reduction in technical capabilities or financial viability of our partners;\n\n•\na misalignment of interest between us and any of our partners;\n\n•\nthe termination of our relationship with a major systems integrator or OEM; or\n\n•\nany adverse effect on a partner’s business related to competition, pricing or other factors.\n\nA 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.\n\nA component of our strategy to grow our revenue includes expansion into commercial markets. To date, biometrics technology has received only limited acceptance and slow adoption in these markets. Although the recent appearance of biometric readers on popular consumer products, such as smartphones, has increased interest in biometrics as a means of authenticating and/or identifying individuals, commercial markets for biometrics technology are still developing and evolving. Biometrics-based solutions compete with more traditional security methods including keys, cards, personal identification numbers, passwords and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including: i) the performance and reliability of biometric solutions; ii) costs involved in adopting and integrating biometric solutions; iii) public concerns regarding privacy; and iv) potential privacy legislation.\n\n9\n\n \n\nFor 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.\n\nIf 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.\n\nOur revenues are derived primarily from sales of biometrics products and services. Our expectations regarding the future growth rate or the size of the biometrics market may not be accurate. The expansion of the biometrics market and the market for our biometrics products and services depends on a number of factors, such as:\n\n•\nthe cost, performance and reliability of our products and services and the products and services offered by our competitors;\n\n•\nthe 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;\n\n•\ncustomers’ perceptions regarding the benefits of biometrics solutions;\n\n•\npublic perceptions regarding the intrusiveness, fairness, accuracy, or potential bias of these solutions and the manner in which organizations use the biometric information collected;\n\n•\npublic perceptions regarding privacy and the use of biometric information;\n\n•\nproposed or enacted legislation related to collection, use and storage of biometric information;\n\n•\ncustomers’ satisfaction with biometrics solutions; and\n\n•\nmarketing efforts and publicity regarding biometrics solutions.\n\nEven if biometrics solutions gain wide market acceptance, our solutions may not adequately address market requirements and may not continue to gain market acceptance. If biometrics solutions generally or our solutions specifically do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth and our revenues, and our results of operations would be adversely affected.\n\nWe face intense competition from other biometrics solutions providers.\n\nA 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:\n\n•\nDiversified technology providers that offer integrated biometrics solutions to governments, law enforcement agencies and other organizations. This group of competitors includes companies such as Idemia, Thales, and NEC.\n\n•\nComponent providers that offer biometrics software and hardware components for fingerprint, facial, iris and voice biometric identification. This group of competitors includes companies such as FaceTec, iProov, and Innovatrics.\n\nWe 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 developing economies and other countries have demonstrated a willingness to sell their products at significantly reduced prices. To compete effectively in this environment, we must continually develop and market new and enhanced solutions and technologies at competitive prices and must have the resources available to invest in significant research and development activities. Our failure to compete successfully could cause our revenues and market share to decline.\n\n10\n\n \n\nThe biometrics industry is characterized by rapid technological change and evolving industry standards, which could render our existing products obsolete.\n\nOur 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.\n\nOur 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.\n\nDespite testing, complex software products such as ours may contain errors, defects, or bugs, which may only be discovered after they have been installed and used by our customers. Defects in the products that we develop and sell to our customers could require expensive corrections and result in delayed or lost revenue, adverse customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.\n\nOur business may be adversely affected by our use of open-source software.\n\nThe 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.\n\nWe rely on third-party software to develop and provide our solutions and significant defects in third-party software could harm our business.\n\nWe rely on software licensed from third parties to develop and offer some of our solutions. In addition, we may need to obtain future licenses from third parties to use software or other intellectual property associated with our solutions. We cannot assure you that these licenses will be available to us on acceptable terms, without significant price increases or at all. Any loss of the right to use any such software or other intellectual property required for the development and maintenance of our solutions could result in delays in the provision of our solutions until equivalent technology is either developed by us or, if available from others, is identified, obtained, and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.\n\n \n\nWe rely on third-party relationships.\n\n \n\nWe have a number of relationships with third parties that are significant to our sales, marketing, support, and product development efforts, including hosting facilities for our cloud-based services. We rely on software and hardware vendors, large system integrators, and technology consulting firms to supply marketing and sales opportunities for our direct sales force and to strengthen our offerings using industry-standard tools and utilities. We also have relationships with third parties that distribute our products. There can be no assurance that these companies, many of which have far greater financial and marketing resources than us, will not develop or market offerings that compete with ours in the future or will not otherwise end or limit their relationships with us. Further, the use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their data security, which despite our due diligence, may be or become inadequate.\n\n11\n\n \n\nPart of our future business is dependent on market demand for, and acceptance of, the cloud-based model for the use of software.\n\n \n\nWe expect to derive a growing percentage of our revenue from the sale of cloud-based services. As a result, widespread acceptance and use of the cloud-based business model is critical to our future growth and success. While cloud-based solutions are widely adopted across many software sub-sectors, certain industries, such as security and government, have been slower to transition due to concerns over data control, privacy, and regulatory compliance. Under the perpetual or fixed-term license model for software procurement, users typically run applications on their own infrastructure, maintaining direct control over their IT environment. Government agencies and security-conscious enterprises may be particularly resistant to shifting mission-critical applications and sensitive data to cloud-based environments due to stringent security requirements, compliance mandates, and perceived risks associated with third-party hosting. If the adoption of cloud-based solutions in these sectors grows more slowly than anticipated or fails to gain traction, demand for our services could be negatively affected, which may, in turn, impact our future growth.\n\nOur operational systems, networks and products are subject to continually evolving cybersecurity or other technological risks, which could result in the disclosure of our or our customers' confidential information, damage to our reputation, additional costs, regulatory penalties and financial losses.\n\nOur products, services and systems may be used in critical company, customer or third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, other proprietary or confidential data, regulated data, and personal information of employees, customers and others. Successful breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems; theft of sensitive, regulated, or confidential data including personal information and intellectual property; the loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service.\n\nIf we or third parties with which we do business were to fall victim to successful cyber-attacks or experience other cybersecurity incidents, including the loss of individually identifiable customer or other sensitive data, we may incur substantial costs and suffer other negative consequences, which may include remediation costs, such as liability for stolen assets or information, repairs of system damage, and incentives to customers or business partners in an effort to maintain relationships after an attack as well as litigation and legal risks, including regulatory actions by state and federal regulators.\n\nOur intellectual property is subject to limited protection.\n\nBecause we are a technology provider, our ability to protect our intellectual property and to operate without infringing the intellectual property rights of others is critical to our success. We regard our technology as proprietary. We rely on a combination of U.S. and worldwide patent, trade secret, copyright, and trademark law as well as confidentiality agreements to protect our proprietary technology. We cannot assure you that we will be able to enforce the patents we own against third parties. Some foreign countries do not currently provide effective legal protection for intellectual property and our ability to prevent the unauthorized use of our products in those countries is therefore limited. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology, and our business would thus be harmed.\n\nIn 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.\n\nWe may be sued by third parties for alleged infringement of their proprietary rights.\n\nWe may be subject to claims that our technology and products infringe the intellectual property rights of others. A large and increasing number of participants in the technology industry, including companies known as non-practicing entities, have applied for or obtained patents. Some of these patent holders have demonstrated a readiness to commence\n\n12\n\n \n\nlitigation 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.\n\nIntellectual 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.\n\nIf we are unable to attract and retain key personnel, our business could be harmed.\n\nIf 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.\n\nOur business may be affected by government laws and regulations.\n\nExtensive regulation under federal, state, and foreign law has adversely affected us and could further adversely affect us in ways that are difficult for us to predict. More specifically, we are subject to regulatory environment changes regarding privacy and data protection that could have a material impact on our results of operations. These regulatory changes may potentially involve new regulatory issues/requirements such as the EU General Data Protection Regulation (“GDPR”), the California Privacy Rights Act (“CPRA”) and other comprehensive state privacy laws, the Illinois Biometric Privacy Act, Texas Statute on the Capture or Use of Biometric Identifier, State of Washington H.B. 1493, Brazil’s General Data Protection Law (“LGPD”) and any other state, federal or foreign regulations governing the collection, use and storage of biometric data. The potential costs of compliance with or imposed by new/existing regulations and policies that are applicable to us, or fines and penalties to which we may become subject if we fail to comply with those regulations and polices, may affect the use of our products and services and could have a material adverse impact on our results of operations.\n\nWe may also be subject to a growing array of laws aimed at regulating the use of artificial intelligence technologies, creating the potential for compliance and litigation risks. For example, the European Union’s comprehensive Artificial Intelligence Act, which became effective in August 2024 with a staggered series of implementation deadlines stretching into 2027, provides for noncompliance fines up of to either 35 million euros or 7% of global turnover. AI regulation also continues to increase in the United States. For example, the California Transparency in Frontier Artificial Intelligence Act, which creates AI-related governance disclosure requirements for certain kinds of AI models, came into force in January 2026, and provides for noncompliance fines of up to $1 million and the Colorado AI Act, which takes effect in June 2026, imposes fines of up to $20,000 per violation.\n\nIn 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; ii) the imposition of tariffs, duties or other restrictions on the goods and services we provide outside of the United States; iii) the imposition of economic sanctions on existing or potential customers or suppliers, or iv) 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.\n\nAdverse economic conditions could harm our business.\n\nUnfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, changes caused by global crisis such as a pandemic, the ongoing conflict between Russia and Ukraine and resulting economic sanctions, conflicts in the Middle East, or other changes in economic conditions, could harm our business, results of operations, and financial conditions as a result of:\n\n•\nreduced demand for our products;\n\n•\nincreased risk of order cancellations or delays;\n\n13\n\n \n\n•\nincreased pressure on the prices for our products;\n\n•\ngreater difficulty in collecting accounts receivable;\n\n•\nrisks to our liquidity, including the possibility that we might not have access to our cash when needed; and\n\n•\nrising interest rates, recessionary cycles, and inflationary pressures, that could make our products more expensive or could increase our costs.\n\n•\nhealth epidemics, impacting the markets and communities in which we, our partners and clients operate.\n\nWe are unable to predict whether or when any such adverse economic conditions could occur in the U.S. or other countries; and if they do occur, we cannot predict the timing, duration, or severity.\n\nWe may not realize the anticipated benefits of our acquisitions or investments.\n\n \n\nWe have made and may continue to make acquisitions of or investments in companies that offer complementary products, services, and technologies. The ultimate success of our acquisitions depends, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating acquired businesses or assets into our existing businesses. However, the acquisition and successful integration of independent businesses or assets is a complex, costly and time-consuming process, and the benefits we realized in some cases in the past have not and the benefits we realize in the future may not exceed the costs of the acquisition. The risk and difficulties associated with acquiring and integrating companies and other assets include, among others, difficulties assimilating the operations and personnel of acquired companies, challenges in realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with the sale of the acquired company’s products. These factors could have a material adverse effect on our business, financial condition, operating results and cash flows. Additionally, regardless of the form of consideration we pay, acquisitions and investments could negatively impact our operations and earnings per share.\n\nWe may have additional tax liabilities.\n\nWe are subject to income taxes in the United States and, in certain cases, in foreign jurisdictions. Significant judgments are required in determining our provisions for income taxes. In the course of preparing our tax provisions and returns, we must make calculations where the ultimate tax determination may be uncertain. Our tax returns are subject to examination by the Internal Revenue Service (“IRS”) and state tax authorities. There can be no assurance as to the outcome of these examinations. If the ultimate determination of taxes owed—including income taxes, value-added tax (“VAT”), goods and services tax (“GST”), or other foreign tax obligations—exceeds amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.\n\nThe 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.\n\nThe 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:\n\n•\nvariations in operating results;\n\n•\nannouncements of technological innovations or new products by us or our competitors,\n\n•\nchanges in customer relationships, such as the loss of a key customer;\n\n•\nrecruitment or departure of key personnel;\n\n•\ntrading volume of our common stock;\n\n•\nprice and volume fluctuation in the overall stock market;\n\n•\ncorporate actions we may initiate, such as acquisitions, stock sales or repurchases, dividend declarations, or corporate reorganizations.\n\nOur 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.\n\n14\n\n \n\nMoreover, 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.\n\nIf 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.\n\nAs a public company, we are required to enhance and test our financial, internal and management control systems to meet obligations imposed by the Sarbanes-Oxley Act of 2002. Consistent with the Sarbanes-Oxley Act and the rules and regulations of the SEC, management's assessment of our internal controls over financial reporting is required in connection with our filing of our Annual Report on Form 10-K. If we are unable to identify, implement and conclude that we have effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Our assessment of our internal controls over financial reporting may also uncover weaknesses or other issues with these controls that could also result in adverse investor reaction.\n\nWe must make judgments in the process of preparing our financial statements.\n\n \n\nWe prepare our financial statements in accordance with generally accepted accounting principles and certain critical accounting policies and estimates that are relevant to our business. The application of these principles and policies requires us to make significant judgments and estimates. The most significant estimates are discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates,” included elsewhere in this Annual Report on Form 10-K.\n\nMoreover, 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.\n\nOur officers, directors and holders of 5% of outstanding shares together beneficially own a significant portion of our common stock and, as a result, can exercise control over stockholder and corporate actions.\n\n \n\nOur officers and directors and the holders of at least 5% of our outstanding shares currently beneficially own approximately 42% of our outstanding common stock, and 51% on a fully diluted basis assuming the exercise of both vested and unvested options. As such, they have a significant influence over most matters requiring approval by stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could have a material adverse effect on the market price of our common stock or prevent stockholders from realizing a premium over the market price for their shares."}