Mitek Systems Inc. (NASDAQ: MITK) is a small-cap stock that generally is not very active in share trading volume, yet Thursday’s move was up more than 50% at one time, based on the company settling all the pending litigation between it and the United Services Automobile Association (USAA). The question to ask is whether this stock should be up this high. 24/7 Wall St. has decided to look at both sides of the coin here. The argument can be made just as easily for the bulls and the bears, so we wanted to point out the facts and some possible explanation to account for a move of this magnitude.

Mitek’s software is used to capture images of financial or personal documents and automatically extract the relevant data. In short, this is often used for digital check deposits and transaction management via its Mobile Deposit solution. The company already licenses out its technology to more than 2,500 organizations, and the company represents that the software is ultimately used by tens of millions of consumers.

Under the terms of the settlement, USAA will dismiss its claims for misappropriation of trade secrets, breach of contract, fraud, inequitable conduct and invalidity of Mitek’s patents. Also, Mitek will dismiss its claims of trade defamation and violations of the Lanham Act. Both companies also will acknowledge distinct patent claims for the other, and neither company will have to admit liability or make a payment to the other.

READ ALSO: Security, Storage and Cloud Technologies to Drive These Chip Stocks Higher

The press release indicated that USAA will retain its license to use Mitek’s Quick Strokes, Quick FX Pro and Image Score software products. Again, if USAA is going to use this it is great, but Mitek already represents that more than 2,500 organizations and tens of millions of users are using the software.

We took a look at recent developments, and Mitek shares took a big drop in August after a judge sided against it with USAA and allowed the suit against Mitek to proceed. The company’s balance sheet as of the end of June 2014 included more than $26 million in liquidity from cash and cash equivalents and its short-term and long-term investments.

Any time a move of this sort is seen, traders and investors often look at the short interest to see how active the bets against the company are. Mitek’s short interest was recently 3.96 million shares — a whopping 27 days to cover, as of August 15. Still, Mitek’s short interest had been as high as 6.3 million to 6.4 million shares in June, and it had been in the 6 million to 7 million share range for months prior to that.

We would also point out that Mitek’s total revenue for the third quarter of fiscal 2014 (released in late July) was $4.7 million, up from $3.9 million in the third quarter of fiscal 2013. The company attributed a portion of the rise in its operating costs (to $6.3 million from $5.9 million) to litigation expenses related to the protection of the company’s intellectual property.

We went back to Mitek’s most recent 10-K filing for its annual report. This was in December of 2013, and its “Legal Proceedings” section discussed its USAA lawsuit:

On March 29, 2012, USAA filed a complaint in the U.S. District Court for the Western District of Texas San Antonio Division against us seeking, among other things, a declaratory judgment that USAA does not infringe certain of our patents relating to Mobile Deposit and that such patents are not enforceable against USAA. In addition, USAA alleges that it disclosed confidential information to us and that we used such information in our patents and Mobile Deposit product in an unspecified manner. USAA seeks damages and injunctive relief. USAA subsequently amended its pleadings to assert a claim for false advertising and reverse palming off under the Lanham Act, and to seek reimbursement under the parties’ license agreement.

On April 12, 2012, we filed a lawsuit against USAA in the U.S. District Court for the District of Delaware, alleging that USAA infringes five of our patents relating to image capture on mobile devices, breached the parties’ license agreement by using our products beyond the scope of the agreed-upon license terms and breached the parties’ license agreement by disclosing confidential pricing and other confidential information for our legacy product installation in the lawsuit USAA filed in Texas.

The courts consolidated the foregoing cases in the U.S. District Court for the Western District of Texas, and on November 19, 2012, we answered USAA’s various claims and counterclaims, moved to dismiss USAA’s Lanham Act cause of action and filed a counterclaim against USAA for violation of the Lanham Act. On February 15, 2013, the court granted our motion and dismissed USAA’s Lanham Act claim.

We believe that USAA’s claims are without merit and intend to vigorously defend against those claims and pursue our claims against USAA. We do not believe that the results of USAA’s claims will have a material adverse effect on our financial condition or results of operations.

What is so interesting here is that Mitek has an obviously great product for those who love simply taking a snapshot of a check and depositing it straight into an account. Still, its market cap is listed as almost $108 million after a 49% gain to $3.52 in late morning trading on Thursday. As of 12.40 p.m. Eastern Time, Mitek had seen 8.9 million shares trade hands, against an average daily volume of about 350,000 shares.

READ ALSO: Is Infinity Fully Valued Now, or Is More Upside Left?

Mitek is a small cap stock that has been public since the 1990s, according to Yahoo! charts. Its 52-week range is $2.15 to $7.11, and shares appear to have peaked around $12 back in 2012, after having been under $1.00 for much of the time from 2005 to 2010.

This is one of those situations in which a move of 50% seems more than excessive on the surface. The problem in addressing a move of this magnitude in such a generality is that its market cap is so small that traders and speculators can run this up or down in a magnitude that can defy logic in traditional mid-cap or large-cap stocks.

Here is some pure pondering and speculation about what may be driving this one higher than it might seemingly deserve. That the technology is widely used by many financial institutions may be a driving force here. Perhaps there is a hope that the company’s technology would get it acquired at some point. If so, putting patent and IP suits behind it would remove that overhanging hurdle. Again, that is mere speculation rather than gospel.

Shares were up as much as 77% in the early bird trading, and the high for Thursday was listed as $4.15 during the normal trading session since the open. Nasdaq shows that the premarket trading had 352,000 shares, and the high was $4.60 with a low of $3.51. In the after-hours session from Wednesday evening (after the news broke), Mitek traded only about 34,000 shares, with an after-hours high of $4.29 and a low of $2.37. Mitek shares closed at $2.37 on Wednesday.

As a reminder, all small-cap and micro-caps of this size can defy logic in trading reaction, and generally longer than most investors can remain solvent if they are on the wrong side of it. 24/7 Wall St. wanted to look at both sides to see if there was an obvious take. Unfortunately, Mitek’s 50% gain is a situation in which either side of the coin may be equally as relevant.

READ ALSO: 4 Chip Stocks to Buy That Don’t Rely on PC Growth

We have placed a call into the company and sent an email to get more information. Any additional data that may come from those inquiries will be updated here in this article. We were sent the quote by the company from Mitek CEO, James B. DeBello. He said,

“We are pleased with the outcome. During this dispute, the number of institutions signed for Mitek’s Mobile Deposit grew from 300 to more than 2,500. Our eight mobile deposit patents remain valid. All the while, we’ve continued to develop innovative mobile imaging solutions.”

A chart (from StockCharts) has been included below for the past three years.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.