by Travis Johnson, Stock Gumshoe | May 20, 2013 2:16 pm
Well, well, well — another month, another Phase 1 teaser from Frank Curzio and the Stansberry folks. And if you’re going to use your massive mailing list of a few million investors to sell a $3,000 newsletter that most of them won’t ever consider, well, you can pretty much predict that the queries will make their way right quick to your friendly neighborhood Gumshoe.
So we’ve got a new one to sniff out for you on this lovely May Monday.
Given the collapse of the junior mining sector, it’s probably no surprise that Phase 1 is enticing us not with a gold-digger but with one of their other “junior” categories of investment ideas — they typically recommend small and relatively illiquid stocks at this newsletter, and they’re usually stocks that they think have dramatic market-changing potential in some way …
… and if you want something big to happen from someone so small, you’re usually talking about a discovery or breakthrough or novel technology — if it’s not the discovery of oil or gold that we’re talking about, it’s almost always something in the biotech or technology industries. This time it’s a tech stock being teased by Mr. Curzio, and he calls it the owner of the “Ultimate App” technology.
You and I are quite familiar with apps, of course — and this isn’t really an “app” so much as it is an add-on layer of technology that can benefit most computing and telecom equipment, it’s all about security and biometrics.
Here’s how Curzio starts out his “presentation” to get our juices flowing:
“‘The Ultimate App’
“A handful of tiny companies are creating the holy grail of computer technology — an “app” for the entire planet. And it’s sparking a bidding war that could make you rich.
“‘Every person, place, and thing on this planet will be connected [to this “app”] within the next 10 years.'”
So … how could you not want to buy that stock, right? Let’s learn a little more about it from the ad:
“Rarely does a new app become a ‘crossover’ hit – desired by a large number of people.
“And never has there been a truly ubiquitous app.
“However, as I write, a new type of ‘app’ is taking the world by storm. Dubbed “the ultimate app” by our experts, it could soon become as universal as computers themselves.
“In fact, it’s already being integrated into the Windows and Android operating systems. Which means it could soon be a standard program on virtually every PC, mobile computing device, and electronic gadget in the world.
“It’s no wonder Jeff Carter, the former head of a Harvard/MIT think tank, matter-of-factly states: ‘Every person, place, and thing on this planet will be connected [to this “app”] within the next 10 years.’
“Or why IBM recently included the ‘ultimate app’ on a list of 5 innovations that has the potential to ‘change the way people live, work, and interact.’
“And I’m not just talking about the U.S. either….
“A study by the European Commission Joint Research Centre reports: This ‘app’ ‘will proliferate in society, extending from initial government use to civil and commercial applications, and that this proliferation will have a profound impact on society.'”
Permission to wet my pants from excitement? Permission granted, sir!
So now that we’ve been told this is the next hot thing to take over the world of computing, what the heck is he talking about? Well, as I said up top, he’s talking “biometrics.” Here’s some more from the ad:
“What this technology can do is actually two-fold – both a boon for technology manufacturers and users.
“Its primary function – what you will most likely be using it for the next time you upgrade your laptop or cell phone – is to keep your private and sensitive information secure.
“But let me be clear: this isn’t some kind of anti-virus software or malware blocker. If it were, I doubt the world’s major tech firms would be fighting for control of it.
“Instead, think of any espionage or sci-fi movie you’ve ever seen where a character, faced with a locked door, allows a matrix of lasers to scan his face, thus opening the door.
“That’s what we’re talking about here.
“The technical term for what we’ve been calling ‘the ultimate app’ is ‘biometrics.’ You see, ‘the ultimate app’ isn’t simply a stand-alone app, it’s an entirely unique field of technology. In layman’s terms, this is highly-advanced computer technology that can identify people based on things like fingerprints, retinal scans, facial structure and voice.
“In the next-generation of computer and mobile computing devices, biometric technology will be as standard as wireless capability.
“Your next laptop won’t be password protected. It will be fingerprint protected.”
OK, so that sounds interesting — and we’ve certainly seen all of this before, from the rumors that the next iPhone will have a fingerprint sensor instead of a “home” button, to the many different technologies that attempt to better authenticate users, to the increasingly frightening surveillance state’s ability to automatically identify individual faces in a crowd. And certainly the products have been out there in the marketplace for a long time, though the mass adoption of things like fingerprint scanners hasn’t really hit yet.
And then we get into talk of how we’re going to make money from this — part of it is just talk about the massive wave of research into biometrics that followed the September 11 attacks, with a big federal push for R&D for systems that will help identify terrorists and increase the effectiveness of customs screening, and apparently biometrics devices were used in positively identifying Osama Bin Laden’s body and identifying several other prominent terrorist leaders.
But larger business, one always presumes, is commercial — the government is a big technology incubator, but once the ideas work there they typically migrate into mass markets. So the profits from these companies should, we imagine, start to climb … and the teaser ad includes mention not only of the several huge gainers in this sector over the past decade or so, but also the implication that the heavyweights are so interested in this sector that they’re likely to snap up any enticing little companies … like, of course, the one Curzio is teasing:
“Already the biggest tech firms in the world, including the ‘Big 3’ of computers, are rushing to stake their claim…
“Just a few months ago, Apple shelled out over $300 million to buy a small company involved in the development of this new technology, which they plan to integrate into their line of gadgets.
“Intel is aggressively developing this technology as well — recently investing millions in a privately held company which would help commercialize ‘the ultimate app.’
“And Microsoft recently began filing patents in hopes of bringing its own version of the ‘ultimate app’ to market in its popular Xbox gaming system….
“I’ve just uncovered one tiny company that holds hundreds of key patents on this emerging technology…
“And this is critical…
“While there are a number of companies building versions of “the ultimate app,” each capable of serving and performing unique functions, this tiny firm creates the patent-protected technologies they need to process and analyze the data that’s collected.
“Because of that, I expect this company to dominate “the ultimate app” space just like Intel dominates the chip market or Microsoft rules the market for operating systems.
“And as this trend enters its next phase, I believe this tiny stock will simply explode.
“For a number of reasons I’ll soon explain, this move could start any day now. When it does, I wouldn’t be surprised if early investors saw gains of 200% or more.”
After all that, doesn’t a gain of 200% seem like a little bit of a letdown?
OK, I guess we’ll accept tripling our money. But still, all those suggestions in the ad of the 1,000%+ gains from early adopters in other industries are what catch the eye.
But we’re getting ahead of ourselves (again) … which of these little companies is Curzio touting today and recommending to his Phase 1 subscribers?
Well, Curzio paints a fairly typical picture for technology progression and adoption — prices come down, biometrics gets fully integrated into laptops and smart phones, consumers get on board, we begin to demand more security than passwords can offer as identity theft continues to be a rising threat — and he thinks that the big runs of many biometrics-connected stocks will continue. He mentions a bunch of other little companies that have risen in value or been taken over during the rise of this technology, including the example that most of us are probably familiar with (Apple’s acquisition of AuthenTec last Summer, which is part of the rationale for the rumors of a fingerprint sensor in the next iPhone).
But then he starts to get into some more specific hints for us, giving the Thinkolator a chance to chew on a couple clues:
“About a year ago, this tiny firm sold some of its valuable patents for nearly $100 million. The stock nearly doubled on the news.
“Then, the company used the cash from the sale to pay investors an additional special dividend of nearly 30%.
“And that was from the sale of just a few patents.
“You see, unlike most biometric companies, this firm doesn’t make any of the devices or equipment used to scan people’s fingerprints or faces. These are low-barrier-to-entry ventures. I mean, anyone can take a good picture of someone’s face with a decent cell phone. Basic video surveillance cameras can do the same.
“The hard part isn’t taking the picture or getting the image… it’s turning that picture into valuable, usable data. And that’s exactly where this firm has the advantage.
“It’s spent more than two decades developing a variety of technologies related to imaging and telecommunications. Its patent portfolio includes 103 U.S. and foreign patents, along with 88 pending patent applications….
… it’s difficult to determine exactly what this small firm’s portfolio is worth but according to published reports, its patents have “tremendous crossover” with the patent portfolios of Nortel, Interdigital, and Motorola Mobility.”
And a few more little teaser hints:
“… the company is flush with cash, and has zero debt. It even owns outright its 72,000 square foot headquarters and the four acres of land it sits on….
they’ve recently won lucrative contracts and/or completed valuable work for:
the U.S. Department of Defense,
the U.S. Department of Justice, and
the Transportation Security Administration.
“They’ve also signed deals with three large-scale border management systems in Europe, the Middle East and North America, as well as an ‘unnamed’ European police agency, which media reports say is analogous to the FBI.
“These lucrative deals, along with their patent portfolio and their tiny, $100 million market cap, all come together to make this firm ripe for the picking.”
OK, so that oughtta be plenty for the Thinkolator, even if it did spend a long, hard winter out in the garage here at Gumshoe Manor. So we’ll just fire that baby up, feed in our clues, cough a bit at the smog … and sure enough, we get our answer: This is Aware (AWRE)
Which did indeed jump a bit over the weekend, thanks no doubt to Curzio’s teaser campaign … though, given the lack of chatter about when the idea would be released or how to receive your next Phase 1 issue, I suspect that this is probably a recommendation that Curzio made to his subscribers previously.
So what is Aware? They are primarily an intellectual property company, with most of their patents and expertise in DSL and in biometrics, and they have a huge amount of cash … and yes, they do own property in Bedford, MA, which does include their 72,000 sq. ft. headquarters building — it’s probably worth less than $10 million, but that’s still noteworthy for a company with an enterprise value of only about $40 million.
Yes, it’s that small. The market cap of the company is right around $110 million now, following the Curzio-inspired rise (and the more substantial climb back in 2012, when they raised a lot of cash by selling non-core patents), but that includes more than $70 million of net cash on the books. That patent sale, by the way, is also why you’ll see a deceptive PE ratio for this company — they reported more than $3 in earnings per share in 2012 thanks to that big sale, but that’s obviously not a recurring earnings stream. There are no analyst estimates for their earnings this year, but if it follows the pattern of previous years they’ll probably have revenue in the $20-30 million range and operating income of one or two million dollars. Which would likely trickle down the income statement to be about 5-10 cents/share in profits.
So they are profitable, they are tiny, and they look quite reasonably valued given the cash position … but the catalyst for growing substantially beyond this size is probably either substantial new licensing deals for the patents and technologies they own, or a takeover or further patent sale.
Their last quarter, however, was promising for those who look for AWRE to gradually grow the biometrics business into a substantial cash generator — they did book operating earnings of $2 million in the quarter from real, ongoing earnings, so although they didn’t have those big “other” items on the income statement like the huge patent sale last year or some smaller but still outsize deals in other recent quarters, it does look like a profitable and sustainable business in part because of the growing interest in biometrics. Here’s what the CEO said in the press release:
“Our strong operating results this quarter were driven by record revenue and profitability in our biometrics and imaging business. Biometrics revenue growth was primarily the result of a large sale to a government agency, solid international sales, and sales of licenses to OEM customers. G&A expenses benefitted from lower patent related expenses as a result of our 2012 patent sales.”
Aware has been a focus of attention from a few private equity shops who hold substantial stakes and directorships, but I haven’t looked into the company enough to know where they came from or what they’re looking for. They have some big insider holders who have been both selling and buying over the past year, though the bought shares have outnumbered the sold — which is a bit unusual and noteworthy for a small company with a spike up in price (the bulk of the buying and selling happened before the special dividend that was announced after the large patent sale last Fall).
Curzio also tosses in some further hints about that insider buying, as follows:
“Executives and other company insiders currently hold over 40% of this company’s shares. And insiders continue to buy more shares.
“Take the fellow leading the company’s patent monetization efforts for example. He also happens to be the one who developed and heads the company’s intellectual property efforts. This guy is a prodigious inventor who is mentioned on the majority of the company’s patents. If anyone understands the value of the company’s intellectual property, it’s him.
“For years, this gentleman has consistently owned just shy of 100,000 shares of the company’s stock. But soon after the company announced plans to monetize its intellectual property, he invested over $1 million to purchase over 300,000 additional shares. In other words, this insider quadrupled his investment in the company.”
That idea is reflected in an analyst report/recommendation of AWRE last year — the insider is Michael Tzannes, who was formerly president and was named on many of Aware’s patents, particularly their DSL patents, and who resigned from the Board of Directors to spearhead the monetization of their patents a couple years ago. That report from February 2012 can be viewed here, or here’s the excerpt:
“Finally, we note the insider purchases of Michael Tzannes, a long-time Aware employee and former Aware CEO and executive chairman. Tzannes is also a prodigious inventor named on the majority of Aware’s patents – if anyone knows the value of the IP portfolio, it is Tzannes. For several years prior to the announcement of the IP spin-off in September 2010, Tzannes consistently owned 91,033 shares. Following the spin-off announcement, in April and May 2011, Tzannes invested $1.02mm to purchase 321,000 additional shares. Tzannes’ investment was effected through the exercise of essentially at-themoney options ($3.18 average basis) that were not scheduled to expire until October 2013; thus, the option exercises were the effective equivalent of open market purchases. In the nine months following Aware’s decision to pursue IP monetization, Tzannes – who developed and heads Aware’s IP efforts – invested cash to increase his share ownership by 4.5x. We believe this is a bullish indicator of value.”
At the time, the stock was just over $3 and that analyst targeted $7 as the fair value, so they were certainly right that there were bullish winds blowing — the stock has tickled $7 a share a couple times over the past year, and it’s now at about $5. With cash of $3.22 per share on the books and no real indication that they intend to invest that cash foolishly or burn through it, I can see how you can spin a tale of pretty limited downside for the shares here.
Whether or not there’s going to be big upside from their actual operating businesses in the next year or two, or a takeover or big patent sale again, well, I haven’t learned enough about the company to even give you an educated guess on that … but hopefully the great readers of Gumshoe Nation can share their thoughts and give us all a better understanding of AWRE (just use the friendly little comment box below).
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