After a Reader's Request... Aware, Inc.

A few days ago (probably more like a week or so) I was asked, by one member of my Google Community, to perform analysis on two companies he considered to be worth looking at. +Terrence Chan , I am sorry for taking so long but as an Accountant having a Tax Office you can only imagine my business hours right now. I have only been able to work on on one so far and wanted to share it with you.

Aware (NASDAQ: AWRE), a company that supplies various products for the bio metrics and digital subscriber line (DSL) service assurance industries primarily in the United States and Germany.

Giving it a first glance, I was reluctant to analyze it because of the low trading volume and lack of awareness on the company. However, I went ahead and looked at it realizing the good opportunity to make money from it. Unfortunately, for my reader, the way to profit from this company is, in my opinion, being on the other side of the trade, shorting the stock, writing calls or buying puts. Please continue reading and see for yourself.

The company has been trading publicly since 1997, and in some years became very profitable, more specific in 99’ and 00’ where they reported $0.21 and $0.52 per share respectively. Nonetheless, the story drifted dramatically on 2001 and then on, after reporting several non-profitable years (5 to be specific). Then, the story started to become “interesting” once again about a year or two ago, this is because, since 2006, the company has reported net profits and during this 2012 showed signs of improving the bottom line (as you can see in the chart below).

But don’t get carried away with that, bottom line numbers (Net Profit and EPS), although are very important don’t tell the story completely. One must dig deeper to find what’s really going on with the business itself. Companies can make money not only in their core business, but also by selling assets they own, as it’s the case of Aware.

Just by reading their latest earnings release (3Q12) I was able to spot red flags all over it. Here is a list:

1.      Aware has discontinued operations on their DSL Service Assurance Hardware as of this quarter.

2.      Out of the $5.3M in revenue they reported, $3.9M came from the sale of patent assets and not from the business itself.

3.      On the bottom line (Net Income), the company reported $10.3M which included $15.2M net gain from the sale of more assets. In other words without the sale of those assets the company would've showed a loss for the quarter.

4.      Year-to-Date Net Income includes $86.4M net gains from patents and other assets. So, out of the $66M of net income that the company has reported YTD, $86.4M has come from the sale of assets and not from the business. Isn't that actually losing?

That is not all, reading a little more Rick Moberg, Aware’s co-chief executive officer and CFO said:

“Third quarter results were driven by three important factors. That is, the sale of a large portion of our DSL patent portfolio, another strong quarter of revenue and profitability by our bio metrics and imaging business, and the completion of the shutdown of our DSL service assurance hardware business.
With respect to our patent monetization efforts, we would like shareholders to understand that the majority of the remaining patents in our patent portfolio after the recent patent sales relate to our bio metrics and imaging and DSL service assurance software product lines. At the current time, we do not intend to pursue patent monetization alternatives for these patents, although that decision is subject to change."

After reading that, there is no need to go forward, this is a broken business and they are practically selling everything of value on their portfolio to subsist waiting for a business opportunity to present. But until that happens, I will not recommend this stock. You may get better results by shorting the stock than by investing in it.

Thanks +Terrence Chan for making that request and I will be working on $BITA later in the month. As for my other readers please feel free to ask about a company you're interested. Although I may not be able to do it very fast I promise I will do it as soon as I can.

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