Description

Aware, Inc. (AWRE) is a small, underfollowed US based company focused on empowering government agencies and commercial entities with biometric technology. The company is at an inflection point as it converts legacy revenue to subscription revenue as part of a corporate transformation toward sustainable and lasting revenue growth. This began when current CEO Bob Eckel joined the firm in Q3 of 2019. In his short time with Aware, Eckel has displayed “Outsider” like qualities and is highly focused on creating shareholder value.

Under Eckel’s guidance the company is well positioned to benefit from organic growth, strategic partnerships, thoughtful acquisitions, and share buybacks.

The company has also recently launched strategic investor communications initiatives which we believe will attract incremental buyers and potentially result in Aware being acquired.

Aware trades on Nasdaq but due to lack of analyst coverage, the market currently values Aware at 1.26x our FY2025 revenue estimate (compared to an industry median of 7.98x), and a TEV/FY2025 EBITDA of 5.3x (compared to an industry median of 22.19x). As management continues to execute, we expect AWRE to appeal to incremental buyers and anticipate the stock trading above $9.7 by 8/2/2025, giving investors a total shareholder return of roughly 137% and an IRR of roughly 24%.

Business

Aware develops and provides biometric software, solutions designed to minimize friction costs, ensure security, and enable institutions with know your customer (KYC) solutions. Aware also places a special priority on enabling end users to own and control their identity.

The company has four key biometric software solutions (liveness detection, biometric SaaS, middleware, and biometric ID system) developed specifically around customer needs enabling ease of doing business.

Aware engages with commercial entities and government agencies operating within the following segments: financial services, enterprise security, healthcare, human resources, citizen ID, border management, law enforcement, defense, and intelligence.

As the world becomes increasingly connected, enabling vulnerabilities leading to identity fraud, Aware’s offerings provide greater real value for stakeholders.

The biometrics addressable market specifically targeted by Aware is expected to grow at a CAGR of 13% from $11 billion in 2020 to $20 billion through 2025. The industry is also extremely fragmented leaving opportunities for Aware to make strategic acquisitions and leaves the possibility of Aware being acquired.

Bob Eckel, the company’s CEO who joined the company in September of 2019 has substantial experience in both technology and biometrics. In his short time at Aware, Bob has set and communicated clear goals around achieving sustainable and lasting revenue growth. He has also displayed deep understanding of key drivers around stakeholder value creation.

History

Aware has operated within the biometric space since 1996. Beside a series of special dividends paid to shareholders in the 2010s as the result of patent sales, the company has largely destroyed shareholder value. The company has maintained a material cash balance for years and has never been operated by management savvy enough to create real value with it. Over the past 18 months, Aware has undergone significant change creating what we believe to be a significant turning point in the company’s history.

Thesis

Beginning in late 2019 Aware began a corporate transformation. The company has since refreshed significant portions of management and the board. Under new leadership, Aware completed its first acquisition and is executing on strategic initiatives to achieve sustainable revenue growth. Management is properly incentivized to create shareholder value and is currently performing due diligence on a second acquisition target. In the last twelve months, the company successfully repurchased shares for what we believe is far below intrinsic value and has rolled out a comprehensive investor engagement communication strategy. As management continues to execute, we believe significant demand will be generated for AWRE stock attracting incremental buyers.

Management

Starting with the appointment of current CEO Bob Eckel in Q4 2019, the company has experienced significant management overhaul.

On September 19, 2019, Aware announced the appointment of Bob Eckel as Chief Executive Offer and President. The company had previously engaged Eckel on a consulting basis. In his employment announcement, Mr. Eckel has said,

One of my passions is to build and lead companies that enable individuals to experience the life we deserve through technology. My background in secure identity solutions, biometrics technology, and complex systems will help me drive this mission for Aware.

Eckel has a background in engineering and holds 25 patents mainly focused on systems and authentication. His patents can be viewed here: https://patents.justia.com/inventor/robert-andrew-eckel.

In the Aware’s Q4 2020 conference call, Bob outlines the opportunity set at Aware and explaining why he joined the company. He says,

I saw a great deal of potential upside and scale in the company and reputation focusing on the product offerings and growing the commercial customer base directly and through channel partners. I’ve dedicated my early tenure to enhancing Aware’s market profile and addressing these opportunities along with building our team.

Since joining Aware, Eckel has been working diligently to surround himself with a strategic mix of talent.

On October 1, 2019, Aware announced appointment of Robert Mungovan as Chief Commercial Officer. Mr. Mungovan most recently served as Vice President, Biometrics at Aware and has been with the firm since 1997. Eckel said of Mungovan,

Over the past several years, Rob has played a key role in the development of Aware’s biometric software business and we look forward to his continued efforts in promoting our leading biometric software solutions in the government and the commercial markets.”

On November 19, 2019, Aware announced appointment of, Mohamed Lazzouni as Chief Technology Officer. Mr. Lazzouni was formerly the President and CEO of Epochal Technologies, Inc. Eckel said of Mr. Lazzouni,

We're pleased to name Mohamed as the Chief Technology Officer of Aware, leveraging his many years of experience in the industry leading research and product development teams and the commercialization of technology solutions. I have worked with Mohamed in the past and have seen first-hand his ability to lead technology teams to develop transformative technology solutions in the identity space. I look forward to Mohamed leading the development of Aware biometric software solutions in the government and the commercial markets.

On May 4, 2020, Aware announced appointment of David Barcelo as Chief Financial Officer. He most recently served as Vice President of Strategic Marketing of IDEMIA (OT-Morpho). Eckel said of Mr. Barcelo,

I have worked directly with Dave in the past and I am confident in his ability to lead Aware’s finance and operations organization and implement and execute on our strategic goals.

In addition to a management overhaul, Aware has made some changes to the Board of Directors.

Board refresh

Starting with the resignation of Richard Moberg and Adrian Kruse on March 27, 2020, the company has experienced an almost complete board refresh.

According to Aware’s proxy filed 4/12/2019, the company’s directors and executive officers included the following individuals:

https://www.sec.gov/Archives/edgar/data/1015739/000114420419019420/tv518186_def14a.htm

Those highlighted in red, have since retired from or left Aware. Today, Aware’s directors and executive officers include the following individuals:

https://www.sec.gov/Archives/edgar/data/1015739/000119312521111535/d142112ddef14a.htm

Additions to the company are highlighted in green. Those not mentioned in the “management” section above include Peter Faubert and Gary Evee.

On March 27, 2020, Peter Faubert was appointed to Aware’s Board of Directors.

Mr. Faubert currently serves as the Chief Financial Officer, Treasurer and Secretary of Evolv Technology, Inc., a leader in free-flow threat detection technology, a position he has held since October 15, 2019. He brings over twenty years of extensive finance leadership for public and private software companies that focused on security technology, video service providers, mobility, gaming and enterprise computing.

On October 1, 2019, Aware announced nomination of Gary Evee to the Board of Directors.

Mr. Evee is the founder and chief executive officer of Evee Consulting Group, a trusted technology and digital transformation advisory services partner that enables clients to confidently reduce risk by taking control of their security and accelerate business growth through digital transformation. He has over 25 years of information technology experience, most recently serving in IBM’s Cybersecurity Business Unit, where he led worldwide sales, business development and go market functions for IBM’s mobile and financial services cybersecurity solutions.

Many of Aware’s executives and directors have worked together in the past and we look forward to seeing the team execute moving forward.

AFIX transformational acquisition

On November 17, 2020, Aware acquired the AFIX product line from Maxar Technologies. The deal did not involve an auction and has been significantly positive for Aware. In Aware’s Q4 2020 conference call, Eckel refers to AFIX as,

a fundamental building block of our growth strategy. The acquisition provides technology to complement our newly launched AwareABIS and most importantly, access to over 180 active law enforcement customers to augment our new product line. Most importantly, the shared expertise and cultural fit between the teams bodes well for our future success.

In the company’s Q2 2021 conference call, Eckel speaks further about successful integration of the AFIX product line. He states,

With AFIX under our wing and part of our portfolio, we have also experienced remarkably positive second order effects that will ultimately play a transformational role and bolstering our top line. By acquiring the AFIX customer book of business, we have developed a strong lever through which we are able to address bids for much larger projects.

Our association with AFIX has provided us with references based on more than 500 sites across the U.S. and in more than 25 countries. Some prospects are looking to solve problems that our core offerings address would not entertain our bids without the street cred that these reference is provided.

We expect the AFIX acquisition to produce significant positive IRR in short order and look forward to future strategic acquisitions

Sustainable growth strategy

In the company’s 4Q 2020 conference call, Bob Eckel communicates the company’s sustainable growth strategy consisting of three primary components; focused offerings, SaaS transformation, leveraging technology and partnerships to access new growth opportunities.

1.       Focused offerings

The company has chosen to focus its efforts on key customer needs rolling out platform and framework offerings that can be integrated faster with better flexibility. Key offerings include Knomi, Indigo, BioSP, and AwareABIS.

2.       SaaS transformation

The company is undergoing a significant SaaS transformation shifting products to Biometric Identity Management as a Service. The company is prioritizing a usage-based model and expects the SaaS offerings to drive growth in multiple verticals.

Currently the company recognizes revenue up front for a customer’s “minimum commitment” and then recurring revenue kicks in on a usage base after that. According to Eckel,

As we continue to ramp up the subscription side of our business, our model tells us that some of those lumpiness will more or less fade away as the lump sum minimal contract recognitions represent a smaller proportion of total revenues than the recurring revenue base. We’ve also begun to see initial expansion in our installed base with existing customers, leveraging our product portfolio for more use cases and/or adding modalities to address additional applications of our technology.

The subscription transformation is going extremely well. In the first half of 2021, the company booked over 18 million Knomi transactions, up from 11 million in all of 2020 and up over 5x for the same period year over year.

3.       Strategic partnerships

Strategic partnerships are increasingly becoming a significant engine for Aware’s growth.

In the company’s Q4 2020 conference call, Eckel does a wonderful job of explaining mechanics of aligning with strategic partners and the value it creates.

In these partnerships, we provide our software to OEMs, value-added resellers and integrated resellers. They, in turn, find innovative ways to integrate our products with their hardware or solution and bring them to market at a rapid pace without needing to invest in biometrics or the expertise in biometrics technology. Simply put, these white labeling scenarios with our partners are integral in demonstrating the superiority of Aware brand in winning new customers.

Not only will the strategic partnerships strengthen Aware’s present in existing markets the company serves, Eckel also mentions the potential entry into entirely new verticals, including,

data and network security, personal security, consumer services, health care and the shared economy. As a result of our 2020 efforts securing partners, we entered 2021 with a robust pipeline of opportunities. Engaging partners not only helps us expand market share in existing growth markets, but also helps us penetrate emerging markets, which are becoming larger and larger components of the total addressable market.

Aware has his sights set on the healthcare biometric vertical which is growing at a CAGR of 24.2%. Eckel says, “we see a fit for biometrics in any use case where trusted transactions are important and healthcare is no exception.”

Aware is executing nicely on strategic transformation toward sustainable revenue growth. Eckel has outlined a clear and concise plan and we look forward to observing Aware’s success.

Incentives and shareholder alignment

The company has designed a thoughtful compensation structure that incentivizes management to create shareholder value.

None of the executives receive unreasonable pay. Total compensation for Bob Eckel, Rob Mungovan, and Mohamed Lazzouni in 2020 was $482,538, $378,744, and $402,233 respectively.

The equity award portion of executive compensation is tied directly to Aware’s stock price. Executives are granted equal number of options with strikes of $4.50, $5.50, $6.50, $7.50 (well above the current stock price). We believe this highly incentivizes management to increase the long term value of Aware.

In addition, Eckel, Lazzouni, Barcelo, and Mungovan are eligible to receive “target bonuses” based on particular KPIs. The exact breakdown is as follows,

Robert Eckel, Mohamed Lazzouni and Dave Barcelo will have their potential Financial Goal target weighted as 50% Revenue, 25% Bookings and 25% Operating Cash Flow. Robert Mungovan will be weighted at 35% Revenue, 50% Bookings and 15 % Operating Cash Flow.

Finally, the company offers a bonus for “operational goals” that directly incentive managers to execute on the drivers of Aware’s KPIs. These drivers are outlined in the following 8-K: https://www.sec.gov/Archives/edgar/data/1015739/000119312521043628/d108369d8k.htm.

We believe Aware’s total compensation package is thoughtfully planned out and incentivizes management to focus on the correct growth and profitability drivers.

Inorganic growth

Aware has net cash of over $35 million and Bob Eckel has discussed openly his goal of making multiple accretive acquisitions. In the company’s latest conference all, he explains,

The AFIX acquisition is exemplary of how we want integrations to go. The team is ready and skilled in this area. It’s also an excellent case study that speaks to the effectiveness of a hybrid organic and inorganic growth strategy. As Dave said earlier, we are in a strong financial position and are looking to deploy capital to the highest value inorganic opportunities.

To that end, we’ve identified additional opportunities that we believe meet our criteria. Though, we do not have any updates to report at this time, we are continuing to actively monitor and review the space and ramp up our diligence.

Eckel has not disclosed the specifics of Aware’s next acquisition, but we have confidence in his ability to identify and negotiate value creating deals.

Share buyback program

In May of 2020, in the wake of the COVID-19 selloff, the company authorized the repurchase of up to $10 million worth of company stock. In Q4 2020, the company purchased 298,000 shares for an average cost of $3.02 per share (a 26% discount to todays price). The company has a strong balance sheet with over $35 million in cash. We greatly appreciate management’s willingness to include buybacks as part of their capital allocation strategy.  

Investor engagement

In the Q4 2020 earnings call, Eckel mentions the company’s strategy to enhance investor engagement with quarterly earnings calls, by participating in wall street conferences, and through more frequent communication with investors and analysts. The company also recently engaged with Gateway Group, Inc. as the company’s investor relations (IR) firm.

We believe the company’s commitment to engaging with shareholders is a move in the right direction and expect it to drive significant awareness for AWRE stock as management executes.

Valuation

Aware recently began disclosing subscription revenue. Due to “minimum” subscription commitments, Q1 2021 was a bit higher than Q2 2021. As management has mentioned, investors should expect subscription revenue to smooth out and become less lumpy as the recurring portion begins to outpace upfront minimums. Here is a breakdown of Aware’s disclosed subscription revenue. It is becoming clear how much progress Aware has made to transform their revenue base to recurring subscription.

Aware doesn’t provide significant transparency around unit economics, however we were able to triangulate cost per transaction for Knomi. Transactions for full year 2021 are expected to be greater than 36 million up 227% for FY2020 of 11 million. Aware is also displaying evidence of increased transaction value to the company at $0.62 per transaction versus $0.54 in 2020.

Our valuation depends on management’s continued execution, additional acquisitions, and future analyst coverage leading to future incremental shareholder interest. Using our model, we anticipate Aware trades at an TEV/Sales of 4.01x and a TEV/EBITDA of 18x (conservative relative to industry multiples of 7.98x and 22.19x respectively).

We think that with proper execution, Aware may to grow much faster than our expectations and has a potential to re-rate with upside of over 300%.

Risks

While Aware carries a large cash balance on hand which provides somewhat of a margin of safety, investing in the company doesn’t come without risks.

Execution

There is a chance that Bob Eckel and his team will fail to execute on their plans at the level we are expecting. This could cause AWRE stock to stay flat or trade down from here. It depends on how much of the company’s cash is used in the process.

Competition

Aware faces competitive business circumstances. Key competitors in the government agency space include Idemia, Thales, and NEC. Key competitors in the component provider space include FaceTec, Dermalog, and Innovatrics. As the industry tailwinds provide attractive growth prospects, Aware also faces the threat of new entrants. To mitigate these risks and compete effectively, the company has prioritized the research, development, and marketing of new and improved solutions and technologies.

Customer concentration

In 2019, one customer represented 16% of the company’s total revenue. Loss of this customer could materially impact Aware’s revenue.

Lack of insider ownership

While management is properly incentivized with stock, and has purchased shares in the open market over the last twelve months, none of the executives at Aware own material sums of company stock relative to personal net worth. Bob Eckel most recently purchased shares in the open market on May 17, 2021 for $3.51 per share.

No need for investment banking products

The company may have trouble getting sell side analyst coverage due to its strong cash position and lack of need for investment banking products and services.

Concentrated shareholder

The Stafford family has been involved with Aware for many years dating back to the 1990s and owns roughly 34% of the company’s outstanding shares. John Stafford Jr. and his son John Stafford III were involved in Ronin Capital, LLC a CME Group clearing firm. In March of 2020, the firm was forced to liquidate for not meeting capital requirements. Because the firm had no “outside” money, no clients were harmed. https://www.cnbc.com/2020/03/20/clearing-firm-ronin-capital-unable-to-meet-capital-requirements-at-cme-sources.html

This situation still gives us concern in that if the family were forced to liquidate for some reason, it would potentially take them roughly 176 days to cover at current average volume levels.

We tracked the family’s stock holdings according to Aware’s Proxy statements. It appears the family was not forced to sell any AWRE holdings despite the liquidation of Ronin Capital. Majority of the family’s shares appear to now be controlled by John Stafford, III under his control of Ronin Trading, LLC.

Furthermore, it is disclosed in the proxy filed on 4/9/2020 that significant funds controlled by Ronin Capital are included in the total assets under management of Millstreet Capital Management, an investment firm co-founded by Board member Brian Connolly. We feel cautiously confident that the Staffords will not be forced to sell.

Too early

Since Bob Eckel took over, the company is showing promising progress. It could take Bob and his team another 5-6 years for their hard work to show through as free cash flow. If that is the case, we may be too early on this investment.

Summary

Aware, Inc. is at a major inflection point in the process of converting legacy revenue to subscription revenue as part of a corporate transformation toward sustainable and lasting revenue growth.

Under Bob Eckel’s guidance the company is well positioned to benefit from organic growth, strategic partnerships, thoughtful acquisitions, and share buybacks.

The company has also recently launched strategic investor communications initiatives which we believe will attract incremental buyers and potentially result in Aware being acquired.

Due to lack of current analyst coverage and low investor awareness, the market currently values Aware at 1.26x our FY2025 revenue estimate, and a TEV/FY2025 EBITDA of 5.3x.  As management continues to execute and provide disclosures around transformation and growth, we expect AWRE to re-rate and trade above $9.5 by 8/2/2025, giving investors a total shareholder return of roughly 137% and an IRR of roughly 24%.

Catalyst

• Industry Tailwinds
• New Leadership
• Transformative Acquisition
• New products
• SaaS Transformation
• Strategic Partnerships
• Accretive Acquisitions
• Share Buybacks
• New Investor Engagement Initiative