Aware, Inc.

Good afternoon and welcome to AWARE's fourth quarter and full year 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'd like to remind everyone that the presentation today contains forward-looking statements that are based on the current expectations of AWARE's management Thank you. Thank you. Thank you. 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 to do so from time to time, OER undertakes no commitment to update or revise the forward-looking 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 that term is defined by the SEC in Regulation G. Non-GAAP financial measures should not be considered in isolation from or 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 directly comparable GAAP measure in the company's earnings release issued today. I would 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 I would like to turn the call over to AWARE's CEO and President, Bob Eccles. Bob?

Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the fourth quarter and fiscal year ended December 31st, 2021. A copy of the press release is available in the investor relations section of our website. We're extremely excited to join you here today to review AWARE's financial and operational progress. As we continue to execute on our growth strategy and business model transformation, we are becoming increasingly bullish about the near and long-term prospects of the company. I'll start with a brief review of our 2021 accomplishments and discuss how AWARE is well positioned for meaningful growth in 2022 and beyond. Then our CFO, Dave Barslow, will review our financial results for the fourth quarter and full year 2021. Afterwards, I'll provide insight on our go-forward strategy and initiatives for 2022. Lastly, we'll open a call for questions. Our 2021 performance reflects the early success of our three-part transformational growth strategy and validates that we are on the right track. This past year was highlighted by material growth and infrastructure improvements, solidifying the foundation and enabling AWARE to scale and capitalize on the increasing tailwinds in the authentication industry. We delivered $16.9 million in total revenue, marking the highest annual revenue level in the last five years. Additionally, within that top line revenue, our recurring revenue grew 46% year over year and our subscription revenue more than doubled. Dave will get into financials in more detail momentarily. In 2021, we strengthened our core offerings in our delivery and support systems. This enabled sales expansion while preparing to launch our new SaaS offerings. We expect our December acquisition of Fortress Identity a pioneering provider of digital ID verification and biometric authentication to accelerate the time-to-market of our AwareID SaaS platform while providing a solid foundation for long-term growth going forward. In particular, FortressID's cloud-native platform, FortressID, uses biometric multi-factor authentication to combine onboarding validation and due diligence for compliance and risk management. Second, it expands our offerings for Electronic Know Your Customer, or EKYC, applications and provides a strong foothold in cloud-based service offerings. These include compliance and risk management for secure digital identities. Third, the acquisition accelerates our SaaS transformation by offering a rich portfolio of risk management authentication solutions for secure financial processing and data breach prevention. Lastly, it enables us to expand our strategic relationship with new partners and new customers around the world. Through the integration of Fortress ID and the continued execution of our three-part growth strategy, our focus is now on accelerating growth and expanding recurring revenue. Before discussing our initiatives for 2022 and beyond in more detail, I'll turn the call over to Dave, who will walk us through our financial results for the fourth quarter and full year. Dave, over to you.

Thank you, Bob. And good afternoon to everyone on the call. Let's turn to our financial results for the fourth quarter and fiscal year ended December 31st, 2021. Our total revenue in the fourth quarter was $4 million, up 17%, but $3.4 million in the same year-ago period. For the full year ended December 31, 2021, Our total revenue increased 49% to $16.9 million from $11.3 million in the same year-ago period. And looking at our operating expenses, for the fourth quarter of 2021, our operating expenses increased 5% to $5.5 million from $5.3 million in Q4 of last year. For the full year of 2021, our operating expenses increased 11%. to $23 million from $20.7 million in the same year-ago period. The quarterly and full-year period increases in operating expenses were primarily due to higher sales and marketing, as well as some general and administrative costs related to infrastructure build-out and the fortress identity acquisition in Q4. The corresponding operating loss for the fourth quarter of 2021 was $1.5 million Thank you for joining us. by increases in operating expenses. For the fourth quarter of 2021, gap net loss totaled $1.3 million or $0.06 per diluted share compared to a gap net loss of $1.6 million or $0.08 per diluted share in the same year-ago period. Gap net loss for 2021 totaled $5.8 million or $0.27 per diluted share. This was an improvement compared to a gap net loss of $7.6 million, or $0.35 per diluted share, in the prior year period. Our adjusted EBITDA loss for the quarter, which we reconciled to gap net loss in our earnings release, totaled $0.9 million. This compares to adjusted EBITDA loss of $1.4 million in the same year ago period. For the full year of 2021, Adjusted EBITDA loss totaled $3.8 million, which was a significant improvement, cutting our losses in half from an adjusted EBITDA loss of $8 million in 2020. Looking at our balance sheet, we had $30 million in cash and cash equivalents at the end of the quarter compared to $33.3 million at the end of the prior quarter. The decrease in cash and cash equivalents was primarily due to our acquisition of Fortress Identity. Aware maintains a strong and strategic cash position that enables us to allocate capital to high ROI opportunities. We continue to actively evaluate strategic opportunities to drive growth and scale as an organization. We have seen significant growth from our Nomi subscription accounts. We recorded 42 million transactions in 2021, a 250% year-over-year increase. The growing transaction volumes attest to the strength and scalability of the Nomi product line, which is paving the way for the future growth as new customers onboard and overall usage increases. This completes my financial summary. Now, I would like to turn the call back to Bob for additional insights on key initiatives and priorities for 2022 and beyond. Bob?

Thanks, Dave. For those of you who may be new to our company, let me step back for a moment and provide a brief overview of who we are and what we do. AWARE is an authentication company. We're driven to create a world where you own your identity. Our mission is to solve everyday business problems using proven and trusted adaptive authentication. When I joined Aware in late 2019, the company was effectively a book and ship company with strong legacy offerings and supporting services, but it had an outdated business model. Even still, I was convinced Aware had a great future because of four key elements, its people, its products, its financials, and a market that was looking to solve everyday business problems while improving privacy, security, and data protection in a way that is low friction and can often be controlled by the individual. Not to mention a growing adoption and acceptance of the biometrics just to do that. I'm excited to say we have a great outlook for next year and beyond, and we've made significant progress to date. When I joined, I started AWARE on a three-part transformational growth strategy. As I shared with many of you during our earnings calls and discussions of our investor presentation, we shifted the company's focus to concentrate on our core offerings, bring them up the value chain, and capitalize on the market trends and biometrics and authentication in general, like increased adaption, acceptance, and use of the emerging infrastructure. We centered on our core markets, but we also penetrated new, growing, and emerging markets. and we emphasized establishing leverage into the offering model, building recurring revenue streams and moving towards high margin subscriptions over individual perpetual licenses. As part of this growth strategy, we are now two years into a three-year transition to a subscription model. Our 2021 financial results show the success we've had in growing our product sales and partnering with resellers and integrated product resellers to expand our reach. They also show our clear focus around product lines and new product launches instead of just selling components and project services. The next step in our growth journey is emphasizing SaaS and increasing our intrinsic value as a business. We plan to address this goal in 2022 in several ways. The first is by strengthening our commitment to our key verticals. Since we have already seen success in these verticals, We plan to solidify our positioning with additional customers in these segments through target marketing and account management. We also will be working to be more visible and make more announcements of customer wins and other accomplishments as we are able is by driving indirect sales channels and markets and commercial resellers and integrated product resellers. That said, in parallel, we'll continue fostering our partnerships with integrated resellers and prime contractors for government initiatives. The third is through a sales and marketing emphasis on our warehouse offerings. The acquisition of Fortress Identity, a cloud-native company, and the subsequent integration of Fortress ID into our SaaS offerings marks an important step towards accelerating our cloud adoption. Lastly, we are building the warehouse intrinsic value through continued growth. In 2022, the biometric market and target will get 20% top-line growth. To improve our long-term positioning, we expect recurring revenue and the commercial market sales become a greater part of our total revenue in 2022. We've built a scalable platform so that our growth continues as our expenses plateau and as we continue to optimize our organizational effectiveness. As such, we are targeting to exit 2023 cash flow neutral to cash flow positive. As we've mentioned on prior calls, we are committed to executing on our growth strategy and achieving scale, both organically and inorganically. This equates to an expected top line of 30 to 40 million in the next two to three years, capitalizing on the aforementioned growth. With a robust balance sheet, we will continue to review strategic opportunities. In particular, we look for opportunities that will further accelerate our growth at a reasonably accretive and synergistic width and advance our product roadmap.

We place particular emphasis on price.

Valuations remain quite elevated, but that doesn't mean we wouldn't acquire strategic growth at a reasonable price. Nonetheless, we'll remain prudent with our capital and ensure we stay in line with our strategy. In summary, We grew our top line 49% in 2021 and are targeting to grow greater than 20% in 2022. Our focus on building recurring revenue streams and transitioning to a subscription-centric model and growth in recurring revenue, and we anticipate our recurring revenue will account for more of our total revenue in 2022. We are demonstrating leverage of our revamped infrastructure, our almost 50% top line growth, contrasted with a 10% increase in operating expenses. We believe we'll be able to cross over to EBITDA profitability in 2023, though the exact timing can't be predicted. And we have a strong balance sheet to execute our growth strategy and to act on strategic opportunities that will allow us to scale more rapidly. In short, we are bullish on our future and the entire team is focused on growth. I continue to be focused on the big picture and long-term outlook, and I'm excited for the opportunities we have in the works and the progress we have made so far. An increasing number of companies and governments across industry verticals and geographies are adopting biometric systems to authenticate and secure their employees and their customers' digital identities. AWARE achieved several financial and operational milestones in 2021 to capitalize on these market trends, and we expect to capitalize on those 2021 We have strong operational momentum and are focused on the execution of our growth strategy and the realization of our subscription revenue model. We are leveraging our business transformation into a platform and SaaS company to position ourselves for sustainable future growth. We remain confident in our ability to deliver solid results in 2022 and beyond. All of us that are wary, excited about what is ahead for our company and industry are and we appreciate your continued support. With that, we're ready to open a call for questions. Matt, please provide the appropriate instructions. Thank you.

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.

Okay, Bob. Before we get to questions, you've gotten a couple mentions of choppy audio during your summary. Can you repeat your summary points?

Yeah, sure. Summary points. We grew our top line 49% in 2021, and we're targeting growth greater than 20% in 2022. Our focus on building recurring revenue streams and transitioning to a subscription-centric model enabled us to deliver 45% growth in recurring revenue. and we also anticipate our recurring revenue to account for more of our total revenue in 2022. We're demonstrating the leverage of our revamped infrastructure and operating model. This is reflected by our almost 50% top-line growth, contrasted with a 10% increase in operating expenses. We believe we'll be able to cross over to EBITDA profitability in 2023, though the exact timing cannot be predicted. Thanks, Bob. Are you seeing any change in deal size? The transformation from perpetual licenses to a subscription model, by definition, does spread out the size of a deal over a different period of time. So it can't be compared apples to apples in the financials. That said, we're still seeing total contract values fall within the typical range that we've been used to. In addition, we're also seeing existing customers with a given total contract value come back and add more to their deal size because they're happy with our product. and are seeing higher than anticipated adoption rates by their customers.

Thanks, Bob. Next question, any update on your SAS offering?

Good question. We've got initial customers reviewing it as well as using our offering. And now we're looking at a combination of Fortress ID customers and our initial customers together to ensure that our offering is addressing the problem and their use cases that we set it out to solve.

Our next question, how many customers are you trialing with today?

Any customer that fits our criteria of our current multi-tenant offering is welcome to try the offer. We're working with a selective set of prospective customers that are willing to provide us the feedback that we're going to use to adapt and enhance our offering. And that's what makes them selective because we want the feedback and we're going through that process now.

Thanks, Bob. Next question. Do you think the sales team is fully built out at this point?

Here's a question where we're going to continue to invest in our sales and marketing team as our sales traction continues to grow. We're mindful of our current cost basis, which we believe we're in a reasonable place. But part of our sales strategy is to partner with resellers, integrated product resellers, and expand our reach. So we are continuing to invest in that area.

Next question. Are you seeing any geographies of particular strength or weakness?

We've got strong traction in Latin America and also with the U.S. government. We're also looking to strengthen our customer base in the EMEA region and the rest of the world where we've been working with several partners. We'll also continue to seek partners and expand our customer base beyond where we have the current footholds because we believe in the benefits that biometrics can achieve. So we're trying to leverage partners wherever we can, given that we don't want to set up a huge base of door-to-door salespeople.

Great. Thanks, Bob. How should we think about OpEx ramping this year?

We don't expect any significant changes to the operating expenses and, you know, any changes we plan would grow in line with last year's percentages of approximately 10 to 15 percent.

Next question. We've received a couple questions about NOMI transactions. What were NOMI transactions in Q4? How should we think about this ramping in 2022?

Well, for the year, we saw over 42 million transactions, but as we go forward, we're seeing traction both with user-based and transaction-based recurring revenue. So we plan on focusing on recurring revenue as a whole rather than categorizing that revenue as one or another. So we're getting requests for user-based, as transaction-based, enterprise-based, subscription, and so we're going to look at recurring revenue as a whole.

Thanks, Bob. Has Omicron pushed deals out to the right?

Well, we've still been seeing an effect from Omicron, for sure. It depends, and it impacts us a lot on our face-to-face activities. It's hard to say what could have been done sooner. Nevertheless, it's still a factor, especially with our face-to-face sales activities, but we are seeing and are able to start to get to more shows and more trade shows now.

Thanks, Bob. Next question. How does AnaniBits technology differ from homomorphic encryption?

That's a pretty technical question. I'll try to answer it the best I can. Homomorphic encryption requires an encrypted computation be implemented inside an encrypted database. So the implication is that the biometric algorithms would be coded with the homomorphic encryption in the databases and restricted to the functions and performance supported by those algorithms. And as such, any improvements to the algorithm, which we know happens frequently, would also require upgrades, bringing about risk and cost. And we've seen this happen too frequently. Some of our organizations that we deal with keep the old and suboptimal systems because they don't want to deal with the impact of the changes. So this model is contrary to our aspiration of sovereign identity and owning your identity because homomorphic encryption comes through data hosting organization and they're the sole owner. Anonimate provides a network-based decentralization approach to distribute the biometric data and activities across the network nodes and eliminates the shortcomings of the homomorphic encryption. And so in our opinion, the way we're doing this is the implication of decentralization leads to better securing of the keys, securing of the matching, easy use of biometrics from the user on any device, and considerably simplify the compliance related to data ownership and compliance requirements. So we're in the early stages there, but there is a difference.

Great. Thanks, Bob. We've gotten a few questions around Anonybit partnership. Can you tell us why it's good for AWARE and what's so exciting about it?

Well, we believe the partnership will enable customers to enjoy all the benefits of the latest biometric technology since it combines the AWARE's best-in-class biometric technology and Anonybit's approach to storing data throughout a vast peer-to-peer network in the form of anonymized bits. So it gives users, in our opinion, confidence that their individual biometric data cannot be stolen or compromised.

Can you elaborate on the technical alignment between Fortress Identity and AWARE?

Yeah, the acquisition of Fortress Identity has enabled us to integrate their digital ID verification platform, Fortress ID, into our own SAS offering, AWARE ID. This expands our offerings around EKYC or electronic know your customer. Fortress ID and Aware ID are complementary platforms and they enhance each other's capabilities. Fortress ID has a strong capability in risk management and online onboarding. Things that they did like due diligence checks, ransom money laundering, counterterrorism finance, politically exposed persons. and Aware ID has strong capabilities in biometrics, document validation, and the orchestration of onboarding and authentication. And by integrating Fortress ID into Aware ID, customers have the comprehensive solution with more options to address digital onboarding and authentication. So they can choose how they want to do it.

Thanks, Bob. We've got a couple questions on the stock buyback plan. Could you provide additional details on the 10B51 plan that was filed today?

Matt, let me take this one. As you mentioned, we filed an 8K with our 10B51 plan along with our earnings release today. We've implemented this 10B51 plan to support our common stock in a more systematic manner. The share of a purchase trading plan will permit our common stock to be purchased at times when a wearer might otherwise be precluded from doing so or were under insider trading laws or self-imposed trading restrictions. This 10b51 plan is administered by an independent broker, and it's subject to a preset price, volume, and timing restrictions that we set with that broker. So any actual repurchases under the Rule 10b51 plan will be disclosed in periodic reports, which will file under the Exchange Act. There's no assurance as to the amount or the timing or the prices of these repurchases. They're all based off of various market conditions and other factors, and they're subject to the parameters that we set forth in the plan.

Thanks, Dave. Another one for you. Why isn't there more insider buying of a Wares stock?

Yeah, thanks, Matt. The AWARE executives and our employee base participate in an employee stock purchase program where we provide funds to purchase shares on predetermined dates. Since this is all predetermined, our executives and our employees avoid potential overlap between purchasing shares and being in possession of material nonpublic information. The filings are different for these type of plan purchases. So I can understand how this might indicate a lack of insider buying. However, our team is confident in the future direction of the company as indicative by active participation in this plan.

Thanks, Dave. You announced a 10-year lease. Does that mean the building has sold?

So, yeah, we disclosed in today's 8K on March 1st that we entered into an agreement to lease approximately... 20,000 rentable square feet in Burlington, Mass., for a term of 10 years and six months. We'll intend to use this as our principal executive offices going forward. The term of the lease commences on the date that the landlord notifies us that the construction on the premises has been substantially complete. So additional details on this lease can be found in our 10-K when we file that for the year ended December 31st, 2021. We have not yet closed on the purchase and sale of our Bedford office building. We expect that transaction to close prior to our next earnings call, and it will be disclosed in an 8K upon completion.

Thanks, Dave. How's Q1 2022 looking so far?

Well, we think our overall performance and execution of our strategy is best measured on a 12-month period. So I'd encourage you and investors to focus on our annual guidance and our performance instead.

Thanks, Dave. Next question. Any color context in private market valuations? What were the general types of multiples observed perhaps six months ago versus where multiples generally appear to be at the moment?

Yeah, thanks, Matt. This has been a point of analysis for AWARE over the last 12 months. The market valuations for strategic initiatives that we're pursuing have been increasing over time, and most recently in the last couple quarters, they've been extremely high. I'd say probably 10% to 20% higher than we were seeing at the beginning of the year.

Thanks, Dave. Next question. Can you give us a sense of the number of Fortress ID customers you acquired, their size, SMB, large corporation, etc.?

Yeah, so Fortress was a nice little acquisition for us. Their customer base is fairly small but aligned with the type of customers that AWARE is interested in, primarily financial institutions and banks. The customers were not numerous, our acquisition was more aligned to the capabilities and the ability to accelerate our aware ID offering. So the customer base was not the primary focus.

Thanks, Dave. Our next question, you mentioned $30 million to $40 million in revenue in the next three to four years. Can you get there organically or does that assume M&A?

Yeah, thanks, Matt. So our projections are primarily focused on organic growth. We are taking a very opportunistic approach to M&A. As I mentioned, valuations have been high. So we're doing everything we can to reach those numbers with everything at our disposal.

Thanks. How do you define recurring revenue? Which line items are included within that?

Yeah, our recurring revenue is made up of our maintenance stream as well as our subscription stream, both of which are disclosed in our financial statements. And these revenues are recurring on an annual basis for customers that are locked into recurring

Thanks, Dave. What was subscription revenue in the quarter? How much of that was upfront recognition of annual minimums?

Our fourth quarter subscription revenue was about half a million dollars. And as we continue to execute and renew on customers, these annual minimums are more and more recurring. So along those lines, we did not recognize the same type of spike that we did last quarter, and we anticipated smoothing out as we go forward.

Great. Thanks, Dave. 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. I'd like to now turn the call back over to Bob for closing remarks.

Thanks, Matt. I'd like to thank everyone for joining us on the call today. I'd also like to remind you about the investor presentation that's available on our website. We just updated that. So if you haven't already downloaded it, I invite you to do so and learn more about the overall strategy, especially some of you that are new, maybe. And I'd like to also, as usual, thank our employees, our partners, investors, once again, for the continued support. and we look forward to updating you on our next call. Matt?

Thanks, Bob. A recording of today's call will be available for replay via link in the investor relations section of the company's website. Thank you for joining us today for AWARE's fourth quarter and full year 2021 earnings conference call. You may now disconnect.