Concern Over MITK Patent Review @4/19

Wondering how many folks saw the SA article about Mitek Systems (MITK) and it’s patent dispute with Rothschild Mobile Imaging Innovations, LLC (RMII), and what they thought about said article:
http://seekingalpha.com/article/3964127-avoid-mitek-systems-….

The key takeaways from the article are:

-The results of an IPR review (Inter partes review is a trial proceeding conducted at the Board to review the patentability of one or more claims) will be known April 19th.

-RMII expects to be victorious against MITK and the named defendant banks that use MITK’s products, such as JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo & Co.

-MITK has apparently agreed to indemnify the banking defendants and is potentially on the hook at a trial or in a settlement for damages for all of its users.

-Per the author, Given the size of those customers (which are essentially all of the top 100 banks in the United States) and just how many checks they have processed in the past several years, any settlement on the many hundreds of millions of checks Mitek processes annually for its thousands of banks would be significant to a company of such small size. Indeed, Mitek had an excellent quarter for its most recent quarter but only created 1 million dollars in cash flow. Therefore, even a settlement of just several million dollars, while not a vital threat to the company’s existence, would be enough to erase the cash flows of 2016.

Thoughts
I opened a position in MITK on 3/18 and it has appreciated 2.3% in that short time. It’s future looks very bright, however, this is obviously a concern, at least for the short term, especially given that the amount of potentially damage to MITK is unknown.

How much has MITK accrued for this potential loss? Full disclosure: I have not investigated this yet, and the author does not mention whether MITK has or not. Given that this has been out there since 2014 when RMII initiated it’s suits, proper accounting rules would require MITK to book a contingency based on best estimates.

The author also mentions that this could purely be a strategy on RMII’s part to put pressure on MITK, who must have some conviction that they will win since that have refused to negotiate per RMII’s PR.

What do you guys think?

Cheers,
MJ

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The author also mentions that this could purely be a strategy on RMII’s part to put pressure on MITK, who must have some conviction that they will win since that have refused to negotiate per RMII’s PR. What do you guys think?

I would agree with the author that if MITK refused to negotiate that means they think this is a nuisance suit that is meant to get them to pay a couple of hundred thousand dollars to get the other guys to go away. (But who knows how a lawsuit will turn out?) The fact that the RMII is publicizing the suit now seems to confirm that, and suggest that RMII is getting desperate, and worried that they will end up with nothing but legal fees. (If not, why not just wait a week for the suit to be settled and crow then).

But this is just my total guess.

Saul

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My bad guys, I should have done the due diligence and followed up on this prior to making this post.

From footnote #7 from Mitek’s 10Q for the period ended 12/31/2015 (http://investors.miteksystems.com/secfiling.cfm?filingID=156…)…

The Company believes that RMII’s claims are without merit and intends to vigorously defend against those claims. The Company does not believe that the results of the RMII Lawsuits will have a material adverse effect on its financial condition or results of operations.

Cheers,
MJ

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I’m no IP expert, but I do (perversely) enjoy thumbing through the occasional 10-K.

Today was the first investigating I’ve done on MITK. From what I’m reading, MITK is not worried at all about an unfavorable ruling. Whether that is a wise position or not, time will tell.

  • Description: As MJ points out, the RMII suit and MITK’s actions are described in detail in several places in the latest MITK 10-K (Risk Factors, Legal Proceedings and footnote 7 to the financial statements). The section concludes with this: “The Company does not believe that the results of the RMII Lawsuits will have a material adverse effect on its financial condition or results of operations.” That could mean they believe the likelihood of losing is very low. Or that the expected penalty/settlement would be very low. Or both.

  • Legal Costs: MITK expenses these in G&A “as incurred.” So there is no contingency set aside for the legal fees. In fact, their 2015 legal costs were significantly ($1.8M) lower than in 2014, suggesting that this could be winding down. Caveat: if the RMII suit does go all the way to trial in 2017, expect those costs to come back with a vengeance.

  • Contingency: To answer MJ’s question on how much MITK has accrued for the potential loss, it appears to be zero. From the Loss Contingencies note: " The Company discloses contingencies if there is at least a reasonable possibility that a material loss or a material additional loss may have been incurred." A “reasonable possibility” seems to be a legal term of art, but it’s a pretty low bar that MITK believes the RMII suit does not clear.

Contrast Mitek’s treatment of the litigation risk with how Delphi Automotive addresses their ongoing tax dispute (related to their 2009 inversion and follow-on IPO) with the IRS. Though they have all the language about being confident they will prevail, they include: “This could have a material adverse impact on our income tax liability”; and then they provide the estimated change in their effective tax rate (from ~17% to 20-22%) that would likely result in the event of an unfavorable ruling. THAT is how a company describes potential impact of litigation they’re legitimately concerned about.

I agree with Saul that the blustery RMII statement reeks of desperation (which is always a stinky cologne). As he also points out, unexpected things can happen at trial, if it goes that far. But from what I’ve read today, I believe MITK’s recent drop presents a great opportunity to pick up a strong company that has been unreasonably beaten down by a classic litigator-crafted press release: full of sound and fury, signifying nothing.

They call me,
Mr. TBS

No position in MITK, but considering opening one

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“I believe MITK’s recent drop presents a great opportunity to pick up a strong company that has been unreasonably beaten down by a classic litigator-crafted press release: full of sound and fury, signifying nothing.”

Nice call Mr. TBS!

MITK was up a tide 6.58% yesterday.

JIm

Banks have seen a lot of abuse from the patent trolls in the past 10 years or so and in the past 4 years they have started to fight back. This case is just one of hundreds.

See a report here http://www.bna.com/new-technologies-banks-n17179936102/

The patent troll just wants a cozy settlement, typically under $1M and go away. 8 years ago, the bank would just settle and let it disappear, but now there’s just so many claims coming in that they have to fight. That’s why they are going the distance with this one.

Here’s the complaint https://search.rpxcorp.com/litigation_documents/10921191

They claim to have a patent on taking a picture, associating it with user data and storing in on the internets in an organized fashion.

Well, they do have that patent, in fact they have 5 patents that all say the same:

https://patentimages.storage.googleapis.com/US7995118B2/US07…

http://patentimages.storage.googleapis.com/US20120193409A1/U…

Mitek clearly does exactly what the patents above describe so if they want to win, the jury would have to conclude the patents were invalid. Not sure you can trust a jury doing the right thing. Especially since the patents are extremely verbose and confusing.

Maybe this all is just posturing while negotiating a settlement. After all, a patent troll does not want to go to trail either.