Good afternoon, and welcome to Aware's Third Quarter 2022 Conference Call. Joining us today is the Company's CEO and President, Robert Eckel; CFO, Dave Barcelo; and CRO, Craig Herman. Following their remarks, we'll open the call for questions. [Operator Instructions] 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 as it 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 or wishes to caution you that there are factors that could cause actual results to differ materially from those 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, 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. Additionally, the call contains certain non-GAAP financial measures as the term is defined by the SEC and Regulation G. Non-GAAP financial measures should not 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 directly 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 a link available in the Investor Relations section of the company's website. Now I'd like to turn the call over to Aware's CEO and President, Bob Eckel. 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 third quarter ended September 30, 2022. A copy of the press release is available in the Investor Relations section of our website. We're pleased that you could join us for this quarterly update on Aware. On today's call, I will first discuss our financial and operational performance for the third quarter. Then I'll review the progress we're making solidifying our organizational foundation to drive scale and sustainable growth. Afterwards, our CFO, Dave Barcelo, will provide further details on our third quarter and 9-month financial performance. Following Dave's remarks, our new CRO, Craig Herman, will discuss his initial observations since joining Aware in August as well as share his strategic initiatives that are advancing the company's go-to-market efforts. Finally, I'll review our business drivers and outlook before we open the call for questions. In the third quarter, we delivered $3 million of revenue, $2.6 million of net income and negative $2.5 million of adjusted EBITDA loss. The strong net income we delivered in Q3 was benefited by the $5.7 million gain we recorded in July of 2022 from the $8.9 million sale of our building located in Bedford, Mass. From a top line perspective, our Q3 revenue results continue to be impacted by the challenging macroeconomic environment as we saw several customers elect to delay their purchases to Q4. Transitioning to a new business model is rarely a simple or straightforward endeavor. Nevertheless, despite significant headwinds and the strategic realignment in our sales team, we are very encouraged by our ability to continually increase our recurring revenue which has increased $0.3 million in comparison to the first 9 months of last year to $7.1 million…

Thank you, Bob, and good afternoon to everyone on the call. Turning to our financial results for the third quarter ended September 30, 2022. Total revenue was $3 million compared to $4.2 million for both the second quarter of 2022 and the same year ago period. For the 9 months ended September 30, our total revenue was $11.9 million compared to $12.9 million in the same year ago period. As Bob mentioned, the sequential and year-over-year decrease in our third quarter revenue was primarily the result of unfavorable macroeconomic conditions that led to customers deferring their purchases of our solutions. Now looking at our operating expenses. Our third quarter of 2022 operating expenses decreased to $0.6 million from $5.8 million in Q3 of last year, largely as a result of the onetime $5.7 million gain from the sale of our Bedford Building, which was partially offset by higher sales and marketing spend as we revamped the revenue team and launched AwareID coupled with additional general and administrative costs related to our relocation and an increased bad debt reserve. Operating expenses for the 9 months ended September 30, 2022, which includes the impact of the onetime $5.7 million gain from the sale of our Bedford Building were $12.1 million compared to $17.4 million in the prior year period. Operating income for the third quarter of 2022 was $2.4 million, which includes the impact of the onetime $5.7 million gain from the sale of our Bedford building compared to an operating loss of negative $1.6 million in the same year ago period. Operating loss for the 9 months ended September 30, 2022, was negative $0.2 million compared to an operating loss of negative $4.6 million in the prior year period. For the third quarter of 2022, GAAP net income totaled $2.6 million…

Thanks, Dave. Hello, everyone. I'm happy to be here with you on today's call. Before I jump into my focus areas as CRO, I want to touch on what drew me to the biometrics industry in the first place and specifically to Aware. My prior experience at ExactTarget, I saw people's initial hesitation to have their personal information on the Internet. Once people became more familiar and comfortable with the concept, in particular, how they could benefit from a personalized experience, there was much less customer hesitation. I believe the biometrics industry is at an inflection point similar to the inflection point marketing technology had 20 years ago. It's not a matter of if biometrics will become mainstream, it's a matter of how and when, which brings me to Aware as an industry leader. I was excited for the CRO opportunity with Aware because the company has an outstanding track record of innovating in the space, sizable and recognizable reference accounts and the strong growth strategy that, in my view, had the right focus while still having areas where we can improve our execution, and I can provide value and make an impact. Some of the largest financial institutions and government entities around the world work with Aware and use the company's leading biometric solutions to protect their users. Customers quickly recognize the added value and increased security that comes with biometrics once they deploy Aware's top-of-the-line technology. In the 2 months since I've joined Aware, my excitement has only increased as I'm beginning to see firsthand the customers we work with and what's happening in the identity space. And just this week, the launch of AwareID, which solidifies our transition into a SaaS-based platform company. Aware is extremely well positioned for sustainable growth, and I am highly confident in…

Thanks, Craig. This month, we entered the final phase of our business model transition from a book and ship company to a platform company with a strong base of recurring revenue. We are thrilled to have unveiled AwareID and are optimistic about the offerings prospects to expand recurring revenue. That said, while adoption of AwareID ramps up, we remain focused on accelerating our growth and expanding recurring revenue of our existing portfolio. To drive scale and top line revenue, we're focused on a couple of key areas. First, optimizing our go-to-market strategy. As Craig highlighted, we need to capitalize on the tremendous opportunity within our current customer base and afforded by an expanded partner program. Transitioning to a revenue organization led by a Chief Revenue Officer, was a key part in this optimization process. Craig is leveraging his deep expertise to spearhead Aware's sustainable revenue-generating efforts and has already made a noticeable impact in the short time he's been with us so far. Second, as we discussed on prior calls for many customers, leveraging biometrics is a real cultural shift that requires close attention and guidance. From a people and process perspective, we've realigned our teams and expanded our customer success function to reflect the shift in mindset. From a technology perspective, we intentionally made AwareID functional from the start and easy to consume, so we can increase accessibility of our technology and expand our total addressable market. All in all, we are confident that despite the current macroeconomic headwinds and short-term volatility, we are poised for significant long-term growth as we navigate the final phase of our business model transformation in 2023 and beyond. The team at Aware appreciates your continued support, and we look forward to what is ahead for our company and industry. With that, we are ready to open the call to questions. Matt, please provide the appropriate instructions.

First question is for you, Dave. In Q2, you said you received $8.6 million in net cash proceeds. In the press release, you referenced a onetime gain of $5.7 million, why the difference?

Thanks, Matt. As you know, from our filings, we sold the building for about $8.9 million. After commissions and fees, we netted $8.6 million in cash proceeds. But on our books, we carried a depreciated cost basis of $2.9 million roughly. So we netted a onetime gain of about $5.7 million on the income statement.

Thanks, Dave. There's a question here for Craig. Craig. From your perspective, what does success ultimately look like for Aware?

Sure. Thanks, Matt. Success for Aware, I think will take on a form as the biometrics industry leader with strong consistent recurring revenue, robust client pipeline driving expansion into new markets and geographic areas. With the changes we're implementing and the traction we're having with our enhanced strategy, we are well on our way to achieving this success.

Thanks, Craig. The next question is for Bob. Bob, you've mentioned a healthy pipeline. Can you provide some color or any contract or pipeline wins?

Yes. Thanks, Matt. I think as we previously mentioned, we've added language into most of our new customers' contracts to allow us to announce some customer wins. As Craig mentioned, we've got a robust pipeline and are getting to where we want to be, but it does take a while to get to the next step. Customers signed on 18 months ago are now moving to full launch. We're also seeing those customers increasing their spend with us. One of our long-standing customers has almost doubled their spend with us. And we expect people to come online more quickly with the AwareID SaaS as there's functionality right out of the box, and it's low code. We're seeing good traction with the immigration customers in addition to the large financial institutions.

Thanks, Bob. What sort of feedback did you receive at Money2020 after launching AwareID ?

Craig, do you want to take this one? .

Sure. Thanks, Bob. We spent 3 days on the floor at Money2020 talking with multiple fintechs, fund advisers, banks of all sizes, both credit unions, mid-market, online banks as well as some of the largest banks in the world and others in the financial services space. And the feedback on AwareID, specifically, a low-cost, easy-to-implement solution for authentication, the feedback was ecstatic. We are even more excited coming out of this with a number of great leads to follow up on that this product is really something different in the market, and the market is already responding.

Thanks, Craig. Next question. When do you anticipate your business model transformation to be complete? Is there a metric or milestone you're tracking internally to indicate the completion of the transformation?

Yes, Matt, transformation is an ongoing process, as you know, but we've achieved significant milestones. You heard Craig a minute ago, this week's launch of AwareID and our recent CRO hiring of Craig really expanded our customer success initiatives. They're all critical things that were put in place for our SaaS business model. So we've grown recurring revenue as a percentage of total revenue. And as that percentage increases, we'll be able to speak to ARR as opposed to quarterly revenue. At this time, the best metric to track is our transformation would be cash flow breakeven as it reflects our company's profitability.

Thanks, Bob Our next question. Is it likely you get back to the Q2 level of revenue in the fourth quarter.

Thanks, Matt. Directionally, we expect Q4 to be better than Q3 as we're seeing some headwinds described earlier begin to subside. Annually, given the headwinds we discussed, the full year won't be at the 15% rate we previously anticipated, but we anticipate more growth in 2023 as we work towards that target.

Next question. What are the company's plans for deploying its cash?

Matt, I'll take that. So that's a good question. Aware, as you know, is very fortunate to be back with a very healthy balance sheet. We've got roughly $31 million in cash right now. And I know you'll see in the filings, that this quarter, we put about $20 million of our cash or at least our cash reserves into highly liquid marketable securities, treasuries, AAA bonds and such. We're looking to take advantage of the very attractive interest rates in the market today. If you want any more on that, you can check out the Q filing. But overall, our large cash balance enables us to be patient and smart. We're -- we can evaluate and act on high ROI opportunities organically and inorganically. We'll wait and see how does AwareID do. We've got things in the pipeline, and we're looking to drive scale as an organization and maximize that shareholder value. So at any given time, there's a mix of capital allocation initiatives in review. And as we make these decisions and communicate them, they'll be pushed into our filings with the SEC.

The next question is for Bob. When do you anticipate AwareID contributing to top line revenue?

That's a good question. We -- as we launch it, we anticipate AwareID to nominally contribute to Q4 revenue. As you know, AwareID is a pure SaaS pay-as-you-go model. So as SaaS becomes a more material contributor to our top line revenue, we'll look at providing additional metrics like bookings and backlogs in our quarterly updates.

Bob, are you still expecting to be cash breakeven on a core operating basis by the end of next year?

Yes. We continue to anticipate crossing over to adjusted EBITDA profitability by the end of 2023. Given the current impact of the macroeconomic headwinds, the exact timing is still unknown at this point, but nevertheless, we're comfortable with our current cost structure and do not anticipate adding significant OpEx in the near future.

Dave, how should investors think about your breakeven revenue run rate quarterly or annual?

Yes, I think that -- we think our current cost structure will remain relatively stable. It has recently for the most part and will continue to remain that way going forward. And with that trajectory, you can see that we need about $5.5 million of quarterly revenue to hit that breakeven mark that seems attainable with the growth that Bob was just talking about. So we're checking that later on. And we'll continue that way while our cost of goods remain nominal. And I'll say that way as long as AwareID, our SaaS platform remains a nominal part, that contributes more significantly to the top line and will increase our cost of goods a bit and adjust the target. But otherwise, any growth in top line revenue will help us achieve cash breakeven.

Thanks, Dave, another one for you. Can you explain the 42% decline in subscription revenue year-over-year?

This one is a bit tricky. Subscription revenue, we all take it to be very, very flat. But as we've described in the past, due to the on-prem nature and other attributes, our revenue recognition around this is based off of the committed time period. So in Q3 2022, we had about $400,000 of revenue compared to $1.1 million last year. But overall, for the 9 months, we're flat at $2.2 million in both 2022 and 2021. So the big difference is that in Q3 of 2021, we booked a significant amount of revenue from existing customers that renewed for multiple years, that was -- that's different than it is now. So as a result, instead of our typical annual revenue spike from those renewals, they got skipped in 2022 because these customers, on the good news side, they're locked into 2023. But we saw an unusual lump or increase for revenue recognition in 2021. Otherwise, our practices since then have been to sign and renew contracts for a 1-year basis. And then we recognize that committed value at the time of signing or the time of renewal, which causes the typical annual spike. To be clear, these were -- there was no loss of revenues in any of this. We just recognized more in 2021 and have a skip in 2022.

Thanks, Dave. What were the number of Knomi transactions in Q3?

Yes, Matt, as we've mentioned before, we believe recurring revenue is a bit more reflective indicator of the continued adoption of Knomi because our company's transition into subscription-based platform and the mix of transaction user-based contracts. So, as we mentioned upfront, 69% of our Q3 revenue was recurring. So a very good indicator there. And in the past, we disclosed transaction numbers because there was an early indicator of Knomi adoption and our transition to a recurring revenue model. Now we are seeing customers renewing Knomi at higher volumes. It's been very heartening. We just recently signed a customer that last year or this current year that just ended had about 600,000, 700,000 transactions as they are committed minimal. They went over it. And so we renewed them for next year, 2 million transactions. So almost a 3x increase of them.

Bob, in what ways has Craig made a noticeable impact on the organization?

Yes, it's a great question, Matt. We're excited to have Craig on the team. In the few months that he's been here, Craig's gotten right to work. And I'll give you a couple of quick examples and some quick wins. So he's identified personnel and skills gaps and he's working with HR to quickly fill those positions as well as providing training, refining the sales process to close the gaps and prevent any leakage in the closure, proactively engaging with partners to accelerate the expansion, demonstrating his leadership through his inspiring demeanor, challenging the sales team for improved personal accountability. He's also identifying gaps in the sales tech stack and sourcing the necessary tools to better enable the team for success. And these are just a couple of ways. I mean we look forward to him tackling the initiatives we outlined and seeing how these immediate impacts lead to an impact on revenue. As we mentioned earlier, he is out at Money2020, getting firsthand inputs from our customers.

Thanks, Bob. Our next question, how many customers are trialing AwareID?

As I previously mentioned, there are about a dozen customers that were in a beta program prior to this week's AwareID launch. We're looking to convert those customers to the latest release and expect to add more customers this quarter. So I believe we closed one when we were out there, right, Craig?

Yes.

Got it. Our next question, Aware has $1.42 per share in net cash versus stock price of $1.86, market is giving little to no credit for Aware's operating business. Why do you think this is? And what is the market missing? What is your plan to correct?

Yes. Thanks, Matt. That's a tough one. I wish I knew exactly what our investor pool in the market were thinking. Certainly, as management team, we feel that the company is operating well. Our fundamentals are very strong. We've talked about our cash balance, our ability to grow. Craig mentioned in the call, what he's going to kind of transform the organization. And the best I can say right now is that the market is saying prove it, prove that we have the sales potential that we're talking to. And we will -- we'll start to see the growth that Bob was talking about. And I also have a feeling that it didn't quite recognize just how much the cash and assets Aware has on the books right now?

Thanks, Dave. Next question, where are you going to sell something? Revenue is declining? What is the problem?

Sure. This is -- I'll take this. Yes. I think that we've got some really strong indicators, right? We are seeing expansion with our existing customers, which when transactions go up, demand goes up, which is going to equate to people and other companies looking for solutions. We have a really robust pipeline. Some things pushed out. We have seen delays on people wanting to spend cash and commit when they -- unless they are in almost need to move to something. So deals are taking longer. The third piece is when we're -- we sell predominantly to the enterprise right now outside of AwareID, and this is one of the reasons we launched a SaaS, low-cost solution so that we can get much more of a repeatable stream of clocked customers coming on board. The enterprise takes longer. There's longer decision times, RFPs, things along those lines that can equate to a longer sales cycle, which delays it. So for us, our focus is being in multiple revenue streams with different types of customers and different types of products and we're very bullish on what we'll see coming into Q4 and Q1 into next year.

Thanks, Craig. Next question. Are there cost savings opportunities to be had over the next 12 months should negative macro conditions continue?

I've got this, Matt. Yes. The management team here, we take a very disciplined approach, looking at our growth opportunities, what we should be investing in and where we should be spending our money. As we look over the next 12 months, nobody knows exactly what will happen. We do see growth in our -- ahead of us. We see a strong pipeline. We see good opportunities. And everything we've talked about. Should things upset that and the growth not happened, we have strong cash reserves that allow us to be flexible, but we'll also be wise with the cost basis of the company. There's nothing right now that we feel like is excessive, but we'll have a very disciplined approach to where we invest and where we don't.

Thanks, Dave. Next one is for you. Were there any onetime or severance-related charges in the quarter that will not repeat.

Yes, that's a good question. It's good to call out here. You may have noticed our EBITDA for Q3 was markedly worse than it was last quarter, and that is because there were a couple of unusual costs in there. With the change in the sales organization, we had some severance and some recruiting type expenses that are unusual for the business. In addition, you may notice on our Q filing that we increased our bad debt reserve. We're partnered with a start-up company that in this environment, their funding is questionable. And so we thought it prudent to make some reserves. And overall, that could impact more of our customer base. But most of our customers are good, solid paying government customers. So we don't expect that to be any worse.

Thanks, Dave. Next one is for Craig. The new SaaS product, do you anticipate that customers that currently pay for licenses will transition to SaaS? And how does that change the overall revenue profile of the company?

Sure. Yes, as I talked a little bit about, as we move to more of a SaaS focus in products, the subscription revenue is going to continue to increase. I think where our focus is, is delivering the solution that the customer needs. So if it's in the cloud or a SaaS-based platform, it's something that's low cost and easy to implement, but with little customization versus something that needs to be on-premise with heavy customization, we can go either way. So for us, our focus will be continue to be on the customer and providing a solution that they need while also moving more and more towards a subscription-based revenue.

Thanks, Craig. At this time, this concludes our question-and-answer session. If the question wasn't answered, please e-mail Aware's IR team at awre@gatewayir.com. I'd now like to turn the call back over to Bob for closing remarks.

Yes. Thanks, Matt. I want to thank everyone for joining us on today's call. I also want to thank our employees, partners and shareholders for their continued support. As a reminder, you may learn more about our strategy and the investor presentation available on our website, and we look forward to updating you on Aware's progress on our next call. Matt?

Thank you, Bob. I'd like to remind everyone that a recording of today's call will be available for replay via link in the Investors section of the company's website. Thank you for joining us today for Aware's third quarter 2022 conference call. You may now disconnect.