Aware, Inc.

Good afternoon and welcome to AWARE's first quarter 2021 earnings conference call. Joining us today is the company's CEO and president, Robert Eckel, and CFO, David Barcelo. Following their remarks, we will open the call for questions. If you'd like to submit a question, you can do so at any time using the built-in ask a question feature in the webcast player. Before we begin today's call, I would like to remind everyone that the presentation today contains forward-looking statements that are based on the current expectations of AWARE's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described. Listeners should please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in forward-looking statements that management will be making today. aware wishes to caution you that the factors that could cause actual results to differ materially from the results indicated by such statements. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date made. Although it may voluntarily do so from time to time, aware undertakes no commitment to update or revise the four linking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. Additionally, this call contains certain non-GAAP financial measures, as the term is defined by the SEC and Regulation G. Non-GAAP financial measures should be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, AWARE has provided a reconciliation of these non-GAAP financial measures to the most direct comparable GAAP measures in the company's earnings release issued today. I'd like to remind everyone that this presentation will be recorded and made available for replay via link available in the investor relations section of the company's website. Now with that, I'd like to turn the call over to AWARE's CEO and President, Bob Echol. Bob?

Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. As you will soon hear, we have some very exciting news. After the market closed, we issued a press release announcing our results for the first quarter ending March 31, 2021. A copy of the press release is available in the Investor Relations section of our website. So let me start by saying it's a pleasure to join you all again for our second earnings call together. Just a few months ago, I had the chance to share a bit more about what AWARE has managed to accomplish throughout 2020 in the company's first earnings call in a long time. Today, I plan to discuss the progress we've made throughout the first quarter and why we're realistically optimistic about the remainder of the year and beyond. On this call, I'll provide you with a high-level overview of the quarter's operational results. Then I'll turn it over to our CFO, Dave Barcelo, so that he can review the financial results for the quarter. I will then take some time to discuss what we have on our near and long-term horizons. After that, we'll open a call for your questions. This quarter, we generated our third consecutive period of top-line growth. I'm excited about our increased subscription revenue, which shows our transformation is working. I'm also excited about entering the delivery phase on multiple federal government awards. These continue to bolster our reputation as a go-to U.S. company for their biometric needs. And of course, I'm excited about our record number of quarterly Nomi transactions. Dave and I will talk about the significance of this shortly, but for now, I'd like to highlight that there were more transactions protected by Nomi in the first quarter of 2021 than in any quarter previously, and they were also greater than half of all the transactions throughout 2020. We see these results as a testament to Nomi's value proposition as well as the potential for our transaction and consumption-based business models. Nomi has proven its versatility both geographically and within various sectors. Throughout the world, Nomi is providing a new way for institutions to interact with end users. We are realistically optimistic that the pandemic-related headwinds that we've all experienced will transform into tailwinds. In consideration of the continued impact of the pandemic and vaccine rollouts, we're staying in close contact with our customers and partners to ensure that implementations and service requests are attended to on a timely basis. Nevertheless, we're accounting for these risks in our modeling. To be clear, 2021 will be a period of continued transition and investment in our business. Quarterly revenue may fluctuate due to the timing of revenue recognition, and the lumpy revenues from perpetual license contracts that we are continuing to convert into subscription revenues will still exist. As such, we anticipate a degree in variability in our quarterly results as we progress through this phase. I'm looking forward to talking to you about what lies on the horizon in just a little bit but for now, I'll turn it over to Dave who will walk us through our financial results for the quarter. Over to you, Dave.

Thank you, Bob, and good afternoon to everyone on the call.

Let's turn to our financial results for the first quarter ended March 31st, 2021. Our total revenue in the first quarter increased 26% to $4.4 million from 3.5 million in Q1 of last year. Sequentially, revenue increased 29% from 3.4 million in the prior quarter. Both the sequential and year-over-year increases were primarily due to increased subscription-based revenue related to growing transaction volume from existing customers and the upfront recognition of fixed minimum amounts from two new international wins. Turning our attention to operating expenses, for the first quarter of 2021, our operating expenses increased 21% to $5.9 million from $4.9 million in Q1 of last year. The quarterly increase was due primarily to an investment in additional sales and engineering resources in early 2020 and a full quarter of operating costs from our AFIX acquisition in late 2020. The corresponding operating loss for the first quarter of 2021 was $1.4 million compared to an operating loss of $1.3 million in the same year-ago period. The year-over-year increase in operating loss resulted primarily from the aforementioned operating expenses partially offset by the increased revenue in the quarter. For the first quarter of 2021, Gap net loss totaled $1.4 million, or 7 cents per share, compared to a gap net loss of $1.1 million, or 5 cents per share, in the same year-ago period. Our adjusted EBITDA loss for the quarter, which we reconcile in the earnings release, totaled $1.1 million. This compares to a similar adjusted EBITDA loss of $1.1 million in the same year-ago period. On the balance sheet, we had $36 million in cash and cash equivalents at the end of the quarter, compared to $38.6 million as of December 31, 2020. For the three-month period, we used $2.5 million in the course of operations. AWARE maintains a strong and strategic cash position that enables us to allocate capital to high ROI opportunities as they present themselves. We're actively continuing to evaluate opportunities to ensure that we are making strategic investments to realize growth and scale as an organization. Organically, we've seen significant growth from our Nomi subscription accounts. We've surpassed 7 million transactions in the first quarter alone. In comparison, we had 11 million for the entire year of 2020. The growing volumes attest to the strength and scalability of this product line and this success is paving the way for future growth as new customers onboard based on the recommendations of our current customer base. This completes my financial summary. Now, I'd like to turn the call back to Bob for additional insights on our operational progress in Q1, as well as key initiatives and priorities in 2021 and beyond. Bob?

Thanks very much, Dave.

If you remember from the last call, I shared what we refer to as a three-part transformational growth strategy. I'd like to frame my discussion around those three core pillars and discuss the progress we've made so far on bringing this working strategy to fruition. Before getting to that, though, earlier I indicated my excitement around some successes we had in the first quarter. Let me take a minute to tell you how it's an exciting time to be in the biometric space in general. From a market perspective, there is an increased attention to passwordless authentication in general, and consumers are becoming more confident in biometric technology. Particularly with the pandemic, consumers are looking for contactless and remote ways to verify their identity. We are seeing an increase in demand for touchless biometric solutions, as well as for remote onboarding and authentication as entities continue to look for ways to conduct secure business transactions Thank you for watching this video. and the trajectory of the global SaaS market, also expect to grow to a CAGR of 18%, we reaffirm our transformational strategy and are confident in our approach. And given that multi-factor authentication is expected to be the fastest growing segment, our expertise across biometric modalities positions us well to meet the needs of the markets we're targeting. Now back to our strategy. The first pillar of our growth strategy is the continued transformation of our existing platforms to create focused offerings that more appropriately meet the needs of our clients. As we noticed throughout the pandemic and within the past decade, the world has changed dramatically. You may recall a time when system integrators were required to build large enterprise systems, integrate over and over again with various SDKs. Today's demand focuses on at-the-ready offerings that scale as you grow. and Nomi meets these requirements. Nomi enables proctored and unproctored document verification along with face and voice matching and liveness detection. It is recognized as one of the industry's leading liveness and matching software frameworks and has proven itself to be a hallmark of the AWARE brand. During this quarter, as Dave mentioned, Nomi has secured a total of 7 million transactions. which puts us well on our way to surpassing the 11 million transactions recorded last year. Nomi's performance and adoption reinforces our focus on expanding the offerings geographic and sector diversity. Nomi is up and running around the world. Among the list of customers are some of the largest private sector banks and financial institutions in various regions. Latin America in particular is one of the fastest growing regions in the global biometric software market. In the past few years, there's been a material embrace of the biometric technology both in Latin America's private and public sectors, driven by government spending, increased security spends, cybercrime mitigation, and border management investments. Our existing relationships, combined with our portfolio of offerings that are easy to integrate, easy to install, and easy to use, position us well to capture additional market share and Emerge as the go-to biometric expert in the region. On the last call, we mentioned that a core tenet of our go-forward strategy involves penetrating new growing and emerging markets. While we continue to remain focused on government and financial services, we also recognize a growing list of other areas that can benefit from biometric applications. These include data network security, personal security, consumer services, healthcare and shared economy. This quarter, we made our foray into the healthcare space by working closely with a digital identity company to help institute unified and secure strategies for managing patient identities. The global healthcare biometrics market is expected to grow at a CAGR of 24% over the next four years, which presents an encouraging opportunity. As we onboard new channel partners and continue to win new customers, we believe that we can expand our foothold within the healthcare space and the additional growth markets we've previously identified. Our partnership expansion didn't stop with healthcare. We also recently announced a strategic partner in Intercede. Intercede will power their MyID system with our biometric solutions in order to enable secure, multi-factor authentication and digital identity issuance and management for federal agencies and larger enterprises. Though still in its early stages, we've already secured a significant win. Together with Intercede, we'll be working on a 10-year, multi-million dollar contract to issue and manage a lifecycle of digital identities for thousands of U.S. Department of State employees. Intercede will be performing the integration and providing the hardware. We will be providing the software on the back end. This enables us to focus on our core strengths and reinforce our technological edge throughout the process. We intend to keep you all updated as our partnership with Intercede evolves and share new engagements and success stories. The third and final major piece of our transformational strategy is the shift towards our biometric identity management as a service. These are our customer-configurable, usage-based, use-what-you-need SaaS services. These offerings will drive sustained growth across multiple verticals and ultimately offer a stronger recurring revenue base that grows as our customers grow. Both our subscription and renewing term SaaS models provide recurring revenue. Most have upfront recognition for the customer's minimum obligation followed by revenues commensurate with a particular customer's usage or transaction level exceeding their minimums. As I mentioned earlier, the timing of revenue recognition may cause quarterly revenue to fluctuate. For example, Q1 subscription revenue approached the same level as all of fiscal year 2020. Independent of this, we look at our success with NOMI as illustrative of these business models and we anticipate that we'll finish 2021 with material subscription revenue growth over 2020. For now, the number of transactions secured by Nomi serves more or less as a proxy for the overall growth trajectory of our subscription business with some lumpy revenue whenever we onboard new customers. We expect a steady and material increase in transactions and subsequently subscription revenue as our customers' usage increases and we deploy our SaaS offerings. The model that I just described enables a more consistent long-term performance and an increased quality revenue. It also allows smaller customers to join the game at their own pace. Customers who may have historically felt put off or left out by committing or having to commit to a perpetual license. It's important to emphasize that while we are pleased with our performance this quarter, we're also mindful of the effect that revenue recognition and implementation timelines play in creating revenues that appear lumpy from quarter to quarter. That lumpiness may continue for some time as we transition from our legacy model to our newer subscription-based model. Lastly, I'd be remiss if I didn't briefly touch on our corporate development initiatives. We are aggressively pursuing external growth opportunities that complement our core capabilities and market sectors. However, our near-term focus continues to remain on expanding our pipeline and executing on our multi-pronged growth strategy. We end the first quarter on a strong note and are in a great position to continue executing our strategy throughout the rest of the year. With that, we're ready to open the call for questions.

Matt, please provide the appropriate instructions.

Thank you, Bob.

As a reminder, you can submit a question using the built-in Ask a Question feature in the webcast player. Please hold while we populate the questions.

Our first question is, congratulations on the property sale. Can you discuss the company's future real estate plans? Why now is the right time to sell the headquarters and what you plan to do with the incremental capital?

So, Matt, I'll answer that.

Early this year, we received an unsolicited request from a developer and that was to purchase our office building in Bedford as part of a bid that they're submitting for a big government project. And so in order to include potential purchase in the bid, we are required to negotiate terms and sign a purchase and sale agreement, which we just did. We just completed that. As such, it's a material event. A signing must be disclosed in our FCC filings, which is why we included it in our 8 . That said, A lot must happen. The timeline is uncertain. It doesn't necessarily mean that our building will be sold. But more importantly, the developer has to win the competitive bid from the government. And we don't know what the outcome is of this for some time. But if we do proceed to a sale, details will be disclosed, you know, relative to regulations, therefore, the SEC. Okay.

Thanks, Bob. Our next question is, when does the company intend to start disclosing subscription revenue?

Thanks, Matt. I can take that. This is Dave Barcelo.

And our subscription revenues are disclosed in the upcoming 10Q. They are not on the basis of financials since they have not hit a Thanks, Dave. Our next question is, how would you judge the current progress in commercial biometrics? Yeah, our progress has been very good so far, especially with the recent wins. I believe this quarter, the split between government and commercial is roughly 40-60, with 40% of our sales coming from commercial customers. So very happy with the progress there and with the successes. We're having around the subscription revenues, which are largely coming from our commercial customers. We expect that trend to continue.

Thanks, Dave. We have probably another question for you. Can you provide more color on the two new international wins that are generating minimum revenues?

Yeah, so let me unpack that a little bit.

So the two new international wins, are coming from customers in various parts of the world. We continue to see great progress in Latin America, both in Brazil, Mexico, and other parts of the region. So we've got a new customer in Latin America, as well as an added customer over in Europe. We've seen great geographic expansion here and good progress. And then in terms of the minimum, our subscription revenue is recognized a bit upfront for these two customers, but we will see it recurring with annual renewals at the same levels.

We have another question. Can you provide a bit more context on the consumption-based revenues that you mentioned in the deck? Very impressive transaction count this quarter. Just trying to get a sense of how these transactions are converted into revenue and how you would be interpreting these transaction volumes.

Yeah, that's a great question.

Gives me a little opportunity to expand a little bit on the last bit. So our transaction count isn't necessarily a direct correlation for the subscription revenue of the quarter. As I was hinting at before, we've got these monthly minimums. So our subscription-based customers fall into one of two categories, those with minimum annual commitments and those without. So if a customer has a minimum commitment, then the majority of that annual minimum is recognized upfront in that quarter. and then when they go over, their minimum transaction counts will recognize the revenue as it occurs in that period throughout the year. But for customers that have no minimum, they fall into the latter part of that category and their revenue will be recognized at the time of usage in each quarter. When you think about it in aggregate, the volumes should be a good correlation for annual revenues, but we will be much more lumpy on a quarterly basis due to these upfront minimums for some of the customer base.

Thanks, Dave.

Our next question, we've noticed that there's been some pretty significant M&A activity in the space recently. particularly as it relates to Microsoft's acquisition of Nuance. Given how big they've now become, do you think there is any room to compete on the speech recognition side? How much of an effect do you think the acquisition has on AWARE's ability to compete in high-growth verticals like healthcare?

Thanks, Matt. Well, first of all, it was never our intention to compete against Nuance in speech recognition. Their specialty is around speaker recognition and the use cases associated with that, like when you have a customer call a call center line and speak an answer to get routed to the appropriate representative. We are focused on, in our voice specialty, is on speaker recognition. So the difference is it's less about what you say and more about verifying the identity of the person speaking. I did just mention, as speaker recognition becomes more important as an adjunct or as a fused option relative to face or finger or voice, I mean, or iris, this will also add or eliminate some of the multi-factor authentication needs and some of the friction. So, all that being said, Yes, you know, we know how to do speech recognition, but it's really about the identification of the individual based on their opting in or their use. So we're all about the speaker recognition. And so we don't think the acquisition is going to impact our ability to go after speaker recognition use cases. As a matter of fact, we're working on a couple right now, and we're targeting those in our high-growth verticals, which include health care, and you heard me talk about a healthcare opportunity that we just were able to close this quarter. And additionally, we have the proven expertise and experience for multimodal biometrics and used separately, as I said, or in combination in the enrollment process and the authentication process. And it's a critical piece that's often overlooked, you know, as by companies that specialize in speech recognition. So we're confident that this acquisition won't deter our success in our serviceable, addressable market.

Thanks, Bob. Our next question. I've noticed that a lot of close competitors in OEMs are providing healthcare, travel passes, digital IDs. This seems to be a trend that emerged post-COVID and is growing larger and larger. Does AWARE have a play in this space, or are there plans to work with a partner on implementing a solution like this?

Thanks. I mean, that obviously is a topic of the day and of the year. And as I stated before, we remain focused on our long-term strategy, and we're actively monitoring and discussing around vaccine passports and our close contact with resellers and customers regarding use of biometrics to secure those, control those. We believe that You know, the health applications need to tie to a trusted identity to protect the user. The public and the information that the health app carries or being able to fraudulently document it or create another one is one that they're facing right now. So we want to be able to, and we are, providing biometrics to help enable that not to be the case. Thanks, Bob. Can you shed some more light on when we'll see the transformation pickup speed? What are some indicators that

you've been through the bulk of the transformation. Should we expect to be seeing subscription revenue overtake license revenue in a few quarters, few years?

Well, Dave may be able to add a little bit more color to it, but we can't currently speak with greater certainty as we're in the initial stages of our subscription transformation, both in our legacy perpetual license to subscription transformation, and then also our SaaS services. But as you can see, we do see a steady and positive increase, and we've got some key indicators we've mentioned in the 10Q as we go through this. And Dave talked about the high number of transactions and also the minimum, some of the subscriptions that we've set up.

And also in the past falls, I've talked about term contracts where

We're looking to set up subscriptions, but at a longer term, three and five years, to create the quality of revenue and make sure that the customers are with us for a long time. That also cuts down on their switching costs, and it also gives us a good stand in that. At this time, we're seeing it pick up speed, and we're there to work with our customers from the smallest to the largest. Since we've been able to provide a subscription-type service, we've been able to onboard more smaller players to enable them to make a bigger, I'll say a disruptive impact in the biometrics market.

Thanks, Bob. We have another question. You talked a bit about lumpiness. Is there anything in the quarter to signify this quarter was a high lump, such as license payments or initial subscription payments that may not repeat next quarter?

Dave, do you want to take that one? I mean, I think we just talked about that a minute ago.

But if you don't want to, I can address it either way.

Yeah, Bob.

And I think overall the main message here is that our revenue should be looked at from the annual basis. There is some ups and downs. But, yes, this will be – and our third consecutive quarter of growth, Q2. We're looking to achieve what we can, but we do have some lumpiness in Q1 and we're not projecting out what we're doing on a quarterly basis.

Let me add to that a little bit. I think just to be clear, Dave added something. discussed earlier on the lumpiness. Some of our contracts, subscription contracts, let's say they're a three-year term or a five-year term, most of them have a minimum. So let's say they're saying, okay, we're going to do 1,000 transactions or 100,000 transactions. So a lot of them have a minimum. Whenever that minimum is decided, the revenue will be recognized for that minimum entry level in that particular quarter. And then from there out, as they exceed those minimums, it'll then be added to the subsequent quarters. So the following year, you'll get the same hit again in that quarter. If you have a three-year contract, it'll happen for three years or five, so forth. So there is some revenue recognition relative to the maintenance that's pulled out and other things, but it's very, if you've got a three-year term contract one a month for the whole year, you wouldn't see any lumpiness, you know, if it's the same value.

But again, just to be clear that we're looking at things at a yearly basis. Hopefully that answered your question, Matt.

Yeah, our next question is, if the subscription revenue is disclosed in the 10Q, can you please tell us what the subscription revenue was in the quarter and last year?

Dave, you want to take that one?

Yeah, I can grab that, Bob.

Yeah, so this will be the first time we are disclosing subscription revenue. I think we've talked about it at our last earnings call. So happy to have it in the queue that will be released shortly. Our subscription revenue for the quarter was a shade under $800,000. and as you may have noted in the earnings release we mentioned that our quarterly subscription revenue was the same as or roughly the same as it was for all of last year. So certainly happy about that progress and as we go forward we will continue to disclose or we expect to continue to disclose our subscription revenue and once it becomes material it should be included in the face of the contract.

Sorry, face of the temp queue.

Thanks, Dave.

So we have a follow-up question. Thank you for adding color on the company's plans for inorganic growth via strategic M&A. We'd love to understand how the company thinks about share repurchase versus acquisitions, especially in light of the 2020 share repurchase authorization.

Yeah, let me take that.

Well, one thing, I mean, you can just see what we have.

I think I mentioned in the call, and I know I mentioned in the call, that we're looking at opportunities.

We picked up what we believe was a good match for us. And so we're doing tradeoffs as we go relative to what's the best way to use our cash. So overall, I mean, we have the opportunity and we have the flexibility to do that. and we make that on a quarterly basis and as I said we're actively looking to focus on our long-term growth strategy and in that there's those decisions that we make and have a discussion around depending if we find good fits externally and also whether there's some opportunities internally where we want to accelerate for instance our SaaS services or offerings so I know it's a long-winded question, but there are a bunch of trades that go into that, and it's not a simple are we going to resume or not resume.

We have the option the way we are set up to be able to do what's best for the company.

Thanks, Bob. At this time, this concludes our question and answer session. If your question wasn't answered, please email AWARE's IR team at awre at gatewayir.com. And I'd like to turn the call back over to Bob for closing remarks.

Well, I want to thank all of you for joining us on today's call. During our last call, we mentioned that we'd be releasing an investor presentation containing a bit more of information about the strategy that we outlined last time and here. And that presentation is now available on the Wares Investor Relations website. And, you know, I'd be remiss if I didn't especially thank our employees, partners, investors for their and your continued support.

and we look forward to updating you on our next call. So with that, Matt.

I would like to remind everyone that a recording of today's call will be available for replay via link available in the investor section of the company's website. Thank you for joining today for AWARE's first quarter 2021 earnings conference call. You may now disconnect.