AWRE - NASDAQ

00:05 Good afternoon And welcome to Aware's First Quarter 2022 Conference Call. Joining us today is the company's CEO and President Robert Eckel; and CFO, David Barcelo. Following their remarks, we'll open the call for questions. [Operator Instructions] 00:22 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 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 risk inherent in forward-looking statements that management will be making today. 00:51 Aware wishes to caution you that there are factors that could cause actual results to differ materially from those 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 forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. 01:32 Additionally, this call contains certain non-GAAP financial measures as that term is defined by the SEC and Regulation G. Non-GAAP financial measures should 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 measures in the company's earnings release issued today. 01:58 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. 02:06 Now, I would like to turn the call over to Aware's CEO and President, Bob Eckel. Bob?

02:12 Thanks, Matt. Good afternoon, everyone and thank you for joining us today. After the market close, we issued a press release announcing our results for the first quarter ended March 31, 2022. A copy of the press release is available in the Investors Relations section of our website. We are pleased to join you today and on today's call, I will discuss how the progress we've made on our strategic roadmap during the first quarter has paved the way for continued long term predictable growth for Aware. 02:44 After the high level overview of our operational progress, our CFO, Dave Barcelo who will provide additional details on our first quarter financial results. Then I'll review our 2022 focus and business drivers and outlook. Lastly, we'll open the call for questions. 03:03 Our first quarter financial results demonstrate the continued progress we have made towards building a solid recurring revenue base as we continue to transition Aware into a subscription base SaaS platform company. Our top line increased 17% sequentially and 6% year-over-year to $4.7 million, marking the highest quarterly revenue level since 2018. Even more encouraging, recurring revenue grew 30% year-over-year, driven by a 73% increase in subscription revenue over Q1 of last year. The 73% growth in subscription revenue reflects the expansion of existing partners in addition of new partners all over the world. 03:47 As I talked about on our call in March, adding strategic partners is a top priority for us this year. It allows us to create a foundation for growth without increasing costs, as well as expanding our reach into new geographies and end markets. Several new customers are currently ramping their integrated solution anticipation of a full launch in the coming quarters. 04:11 In Q1 we announced two strategic partnerships, the first with Anonybit and the other with MIRACL. These partnerships aligns seamlessly with the capabilities of Fortress ID, which we acquired in December and who integration into our platform is ongoing. When combined, we expect these three parts and technology to enable us to accelerate the development of our solutions aimed at the financial services market. 04:43 The partnership with Anonybit, which we announced in February and briefly mentioned on our call in early March, specifically addresses biometric data privacy concerns. Anonybit’s decentralized approach to identity data storage uses anonymized data in the distributed network to thwart data breaches and enhanced data privacy. We are working closely with the Anonybit team to bring highly secure, privacy enhanced biometric solutions to customers and their users. This will allow customers to utilize all the benefits of Aware's best-in-class biometric technology, while remaining confident that the individual biometric data will be protected from it. 05:26 We anticipate the combined offering to be deployed across a range of use cases, including password less authentication, access control, time and attendance and visitor management. In March we announced a strategic partnership with MIRACL, a cyber-security software company that specializes in single step secured multi-factor authentication. The MIRACL partnership enhances our cloud-based biometric authentication technology to protect against data breaches and ransomware. By adding MIRACL’s risk management functionality to our platform we can deliver greater value to our customers and increase the number and variety of our easily integrated cloud and SaaS-based adaptive authentication services to best fit our customers' needs and flexibility requirements. 06:14 The added MFA solution to Aware's biometrics allows us to deliver more layers of security beyond passwords, onetime passwords, two factor authentication and others. In addition, it significantly enhances the security of consumer identity and better supports regulatory compliance. The combined solution easily integrates with single sign-on or SSL solutions and adapts better to growing and emerging cyber security threats. 06:44 It is important to note that while these technologies are layers they are carefully orchestrated to not add complexity or friction. As such, we still maintain speed and a frictionless experience. The partnership with the MIRACL is structured as a mutual reseller arrangement, so each company can sell each other's products and integrate them within their own product lines, thereby accelerating the market availability of password less multi-factor authentication that incorporates advanced biometrics. 07:16 We also made a $2.5 million strategic investment in a convertible note issued by the parent company of MIRACL, Omlis Limited to support its growth. Facilitating market adoption of Knomi is a key aspect of growing our recurring revenue base. To that end, we now support Flutter application framework in Knomi version 5.0, transforming the application development process for biometric on boarding and authentication by empowering developers to build and deploy advanced applications across web, mobile and desktop environments with a single code base. 07:55 Developers are now able to integrate Knomi’s state of the art multiple biometric authentication capabilities into advanced customized applications more quickly and cost effectively, expanding Knomi reach, while accelerating customers' time to market. Overall, we made tremendous progress in the first quarter, executing our partner strategy, continuing to build a strong recurring revenue base and setting the foundation for continued long-term growth. 08:25 Now, before discussing our focus for 2022, I'll turn the call over to Dave to walk us through our financial results for the first quarter. Dave, over to you.

08:38 Thank you, Bob, and good afternoon to everyone on the call. Turning to our financial results for the first quarter ended March 31, 2022. Revenue was $4.7 million, an increase of 17% compared to $4 million in the fourth quarter of 2021 and an increase of 6% compared to $4.4 million in the same year-ago period. As Bob mentioned, the year-over-year increase in revenue was primarily the result of higher-subscription based revenue, as well as higher maintenance revenue. 09:12 Looking at our expenses, for the first quarter of 2022, our operating expenses increased 2% to $6 million from $5.9 million in Q1 of last year. The $100,000 increase in operating expenses was due primarily to higher sales and marketing costs. The corresponding operating loss for the first quarter of 2022 was $1.3 million, an improvement from an operating loss of $1.4 million in the same year-ago period. The year-over-year improvement in operating loss was primarily due to higher revenues. 09:46 For the first quarter of 2022, GAAP net loss totaled $1.3 million or $0.06 per diluted share, compared to a GAAP net loss of $1.4 million or $0.07 per diluted share in the same year-ago period. Our adjusted EBITDA loss for the quarter, which we reconcile to GAAP net loss in our earnings release totaled $0.6 million, this is an improvement from adjusted EBITDA loss of $1.1 million in the same year-ago period. 10:16 Looking at our balance sheet, we had $25.1 million in cash and cash equivalents at the end of the quarter, compared to $30 million at the end of the prior quarter. For the three month period, we used $2.5 million for our strategic investment in MIRACL and $2.5 million for operations. 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. 10:50 We also continue to see significant growth from our Knomi subscription accounts. Historically we disclosed transaction volumes, because there was an early indicator of Knomi adoption. However, with the continued growth in recurring revenue and a mix of subscription contracts based off of the number of transactions or based off of the number of users, we believe recurring revenue is a more reflective indicator of the continued adoption of Knomi and our company's transition into a subscription-based SaaS platform company. 11:23 This completes my financial summary. Now I'd like to turn the call back to Bob for additional insights on our key initiatives for 2022 and beyond. Bob?

11:36 Thanks, Dave. Our financial results reflect a continued traction we're realizing on our three-year business model transformation into a SaaS platform company, with consistent subscription and recurring revenue. As I noted on our fourth quarter call last month, the next phase of our growth journey is to launch our Aware ID SaaS platform. We are laser focused on executing on our operational initiatives to accelerate our growth and expand recurring revenue. 12:05 A key driver of our growing recurring revenue, particularly subscription revenue is our partner led sales efforts. Adding partnerships is a top priority and we are seeing great traction in that regard. We recently added new partners in the Middle East, Asia and South America and we're continuing to secure new partnerships that will expand our reach into end markets globally. Our partners well establish customer relationships and deep insights into their customers' needs, facilitate higher adoption of Aware's offerings. Moreover partnerships with commercial resellers, integrated product resellers and prime contractors for government initiatives allow us to build operational leverage, enabling us to expand our revenue without adding additional expenses. 12:54 We anticipate additional partnerships coming online over the next several quarters and to be able to announce those customers wins and related accomplishments once would they have fully launched. Furthermore, we are structuring these partnerships around our future as a SaaS platform company. As we get ready to launch Aware ID in the second half of the year we are working with partners to prepare future offerings based on that platform. We are also ramping our sales and marketing emphasis on Aware ID in our cloud offerings to expand brand awareness in North America and across the globe. 13:31 We remain focused on driving top line revenue growth that exceeds the biometric market CAGAR of 15% with recurring revenue and commercial market sales becoming a larger share of our total revenue in 2022. Additionally, we expect to derive increasing operating leverage from our partnerships with indirect resellers and the scalability of our SaaS platform. We anticipate crossing over to adjusted EBITDA profitability by the end of 2023, although the exact timing is unknown at this point. 14:04 We also remain committed to achieving scale in executing our growth strategy, both organically and through inorganic means. We will continue to view strategic opportunities with an emphasis on SaaS offerings and expansion that would accelerate our growth and/or advance our product roadmap. We will remain judicious with our capital to ensure any acquisitions or investments are in accordance with our growth strategy. 14:31 In summary, given our strong first quarter results and operational progress, we are increasingly bullish about our company's prospects for 2022 and beyond. Our recurring revenue base continues to grow steadily with subscription revenue up 73% year-over-year, we are excited for the upcoming launch of our SaaS platform, Aware ID, which has been enhanced with the capability as a Fortress ID and now our new strategic partnerships with MIRACL and Anonybit. We believe we are well positioned for sustainable growth and remain highly confident in our ability to outperform the broader biometric industry growth rates. 15:09 All of us at Aware appreciate your continued support and look forward to what is ahead for our company and industry. With that, we are ready to open the call for questions. Matt, please provide the appropriate instructions.

15:30 Thank you, Bob. [Operator Instructions] First question is for you, Bob. What does ramping mean with respect to integrated resellers?

16:31 Matt, I think we have an audio problem with Bob. So let me go ahead and answer that for you. When we talk about ramping in the context of our integrated resellers it means we signed an initial partnership agreement. This is typically a minimum initial level. And while we [Technical Difficulty]

17:36 We're experiencing technical difficulties. If you can please hold while we get the situated. We appreciate it. One moment.

17:42 Hey, Matt. Can you hear me now?

17:45 We can. Let me ask the question again , Bob.

17:50 Yeah, go ahead.

17:51 So what does ramping mean with respect to integrated resellers?

17:56 Okay. Yeah, when we talk about ramping it's about where we signed an initial partnership agreement and we typically have a minimum initial level and this was done while we collaborate with them and we work to integrate the Aware technology. And this includes like our mobile Knomi biometric framework or Aware ID adaptive authentication platform. And this is when we integrated into the product offerings and we anticipate a full product launch anywhere from six to 18 months after that. 18:32 And most of our partners will not allow to publicize this relationship prior to the full launch -- full launch, they want to make sure that it's up and running and fully QAed at that time.

18:50 Thanks, Bob. Dave, would you please elaborate on the use of approximately $5 million in cash in Q1?

18:59 Yeah. Thanks, Matt. Sorry, I got dropped a moment ago, but with regards to our cash balance, as of March 31 we were at $25.1 million. And in the first quarter, we used approximately $2.5 million for operating purposes, which is pretty consistent with our usage last year in the first quarter. And then as discussed, we also made about a $2.5 million strategic investment in MIRACL, which was a convertible note.

19:34 Thanks. And other one for you, Dave. Aware recently filed an 8-K regarding the office building sale, would you please provide everyone with an update on that transaction?

19:44 Absolutely. So this has been about a year now in the process and we're coming to the finish line. So, as we discussed -- sorry, as we disclosed we filed an 8-K on April 5, and we recently entered into a fifth amendment of the original purchase agreement and updated closing date to June 30, 2022. There is still possibility of an earlier closing date if both parties agree. In that same 8-K filing, we advised that we had entered into a first amendment of the previously announced lease of an office building in Burlington, Mass, where new headquarters [Technical Difficulty]. This amendment allows us to terminate the lease at any point prior to June 30. We amended -- we added this amendment, so that we can match our newly state with the closing date of the purchase agreement and avoid paying for two offices simultaneously. We expect to move into the new office building before the end of Q3. Copies of the amendments can be found in that April 5, 8-K filing.

20:57 Thanks, Dave. It seems like our audio issues our continuing here. So I'm going to jump in with this next question for Matt. Are you seeing deals getting pushed out because of the macro?

21:10 Interesting question. Obviously, with respect to the macro environment, such as inflation and rising interest rates and the geopolitical climate, we're seeing a slight impact on the activity levels since one of our biometrics use cases onboarding customer for credit applications. So it's a -- it's kind of a key thing. And as the interest rates go up, the demand for that goes down slightly, depending. And also, we don't have any direct business in the area of conflict at this time.

21:49 Thanks, Bob. Are you seeing any change in deal size?

21:55 Not at this time. Deal sizes still, as I said before, fall into the small, medium and large category. And they're all -- they all look about the same and it depends on the readiness or the availability of the user base of our clients.

22:15 Great. Thanks. Can you provide an update on the SaaS offering. How many customers are trialing this? What has been the push back from customers? When will this contribute to the P&L?

22:26 So a couple of things on this to ensure that our offering, our SaaS offering is really addressing or properly addressing the use cases that it's meant to. We have a selective group in financial access, workforce in a range of customers trying for the SaaS platform and providing us feedback. And we're going to use that to adapt and enhance our offerings. 22:50 Typically when we go live with or bring things new to market, we have about a dozen or so that participate in these earlier reviews to provide that feedback. And as far as the timing goes, we're looking forward to our launch in the second half of the year. And to date, the majority of feedback is really been positive. In particular, prospective customers reviewing the early version have commented on how there is nothing really like it in the industry, easy to use. And the constructive feedback has been helpful in augmenting our robust quality assurance process to ensure the optimal user experience. So that's kind of a key area that we're getting good feedback on. 23:32 And all in all, we're excited about the launch and we'll be ramping up our sales and marketing activities closure in the second half.

23:43 Thanks, Bob. Dave, how should investors think about OpEx ramping this year?

23:49 Nothing too exciting, Matt. Overall, our operating expenses are relatively flat. We invested significantly in previous quarters, as you know. However, we will see a slight uptick as we fill some of our planned position in the latter part of this year.

24:05 Great. Thanks. Bob, this one is more industry specific question for you. What is the EI-DAS and does that impact Aware's product offering?

24:16 That's a great question. The short answer is, there is little impact on Aware's product offering. EI-DAS stands for electronic identification authentication and trust services. And it's really a certification based on European Union regulation focus on compliance for electronic signatures. And the aim of EI-DAS, I should say, is to spur digital growth within the EU. And by creating these standards for electronic signatures and advanced electronic signature, electronic seals, time stamps and other proof for authentication mechanisms, EI-DAS enable electronic transactions to have an equivalent legal standing as transactions performed on paper. 25:01 I would say, this would have a greater impact for companies like DocuSign and OneSpan than it does for us.

25:09 Thanks, Bob. What were Knomi transactions in Q1? How should we expect these to ramp throughout the remainder of the year?

25:16 As Dave mentioned previously, we disclose transaction volumes because it was an early indicator of Knomi adoption. What we're finding as we continue to get growth in this recurring area, the mix is now of the subscription contract based on transactions, based on number of users. And so we believe that recurring revenue will be a more reflective indicator of the continued adoption of Knomi in our company's transition, as we get into a subscription-based SaaS platform. So as we talked, it's becoming more and more of a combination and depending on what's easier to consume, so really recurring revenue is going to be the indicator.

26:03 Thanks, Bob. Any color on how Q2, 2022 look so far?

26:10 Well, overall, we believe the strong Q1 results have really put a good foundation for predictable long-term growth and reflects a solid execution of our growth strategy, especially when you look at the recurring revenue relative to the total actual value of the revenue. And as we talked in prior calls, our overall performance and execution is best measured on the longer term, 12-month period. And we encourage everyone to focus on our annual growth plan. There's going to be variations quarter-to-quarter, as we all know, but focusing on a growth rate greater than the biometric CAGAR rate and we're working on performance relative to that plan.

26:55 How should we think about seasonality?

27:01 I'll take that, Matt. [Multiple Speakers] Yes. So in general, our seasonality is minimal. Do you have some dependency or opportunity around the federal fiscal year. So as September rolls around and budgets are being used up, we might get a little uptick here or there. In addition, our Knomi volume, they have got some seasonality dependency related to the holiday season in Q4. But overall, we don't anticipate or forecast any real significant spikes related to the season.

27:43 Thanks, Dave. Another one for you. What is the impact of the adoption of Flutter?

27:51 Nothing on our financials just yet. We are currently supporting the first cut -- first customers, they're leveraging this capability and we anticipate more sales to come based off of the release of our Flutter version.

28:07 Next question is, what is included in recurring revenue? Is it just subscription revenues and software maintenance?

28:16 Basically, yes. Our recurring revenue is our subscription sales and our software maintenance sales, both of which have a recurring cadence to them in contrast to our one-time license sales.

28:32 Thanks, Dave. Another one for you. How much of this subscription revenue in the quarter was upfront recognition of annual minimums?

28:40 Well, let me dissect this one a little bit, Matt. So to clarify, our annual minimums are not necessarily upfront as we come to our second or third year of a contract. So in the quarter we did onboard couple of new customers and that contributed to a couple of hundred thousand of upfront minimum. But we also had around $0.5 million or so of existing customers hitting their annual renewal minimums in this quarter. And then the balance of our subscription revenue comes from the overages that customers hit or they're recurring monthly revenues that are essentially a maintenance stream.

29:26 Thanks, Dave. What was recurring revenue for the quarter?

29:31 I believe it was a bit over $2.9 million for Q1.

29:37 Great. Was any cash used for repurchases?

29:41 No, not in Q1. We announced our repurchase plan last time we are on the call, but we have not yet executed on any repurchases.

29:55 Okay. When do you expect to be cash flow breakeven on an operating basis?

30:02 Yeah. As I mentioned earlier, we anticipate crossing over to adjusted EBITDA profitability by the end of 2023. The exact timing is unknown at this point, but that’s still the plan.

30:18 Thanks Bob. Have any of the senior management team bought stock in the employee purchase plan in 2022?

30:26 Well, that is [indiscernible] question. I mean, the plan is still in process, it's a six-month plan. So until it's over -- it's beginning end of it. It doesn't get disclosed. So it's still in process right now for 2022.

30:46 Thanks, Bob. At this time, this concludes our question-and-answer session. If your question wasn't answered, please e-mail Aware's IR team at [email protected]. I'd now like to turn the call back over to Bob for closing remarks.

31:02 I'd like to thank everybody for joining us today. And also, I'd like to remind you about the investor presentation that's available on our website. And if you haven't already downloaded it, please do so and learn more about our overall strategy. And as always, I'd like to thank our employees, our partners and investors once again for their continued support and we look forward to updating you on our next call. Matt, over to you.