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Tom Shaughnessy is owner of SecretCaps.com, an independent investor and analyst. He has been investing in the stock market since the age of twelve. His style is comprehensive and includes multi-layered research on a concentrated set of stocks. Tom enjoys constructive dialogue regarding various... More
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  • E.Digital: An Intriguing And Undiscovered IP Play  6 comments
    Dec 26, 2013 4:56 AM | about stocks: AAPL, EDIG

    Introduction:

    E.Digital (OTCQB:EDIG) abbreviated as eDigital in this article, is an undiscovered intellectual property and solutions company that has flown under investor radar since its inception. The $22 million dollar company has 7 employees and conducts business in the electronic equipment industry within the consumer goods sector. Founded in 1988 and based in San Diego, California, the company describes itself as:

    e.Digital Corporation is a holding company. The Company licenses and enforces rights to its Flash-R portfolio of flash memory patents for use in portable devices produced by electronic product manufacturers. The Company is also developing new licensable intellectual property related to context and interpersonal awareness systems (Nunchi technology), data distribution and other technologies. The Company also markets and services its eVU mobile entertainment system business for the travel industry. The Company's Flash-R patent portfolio covers certain aspects of the use of flash memory, addressing portable electronic products market. The Company's Nunchi patent portfolio covers certain aspects of advanced context awareness, addressing emerging products, services and revenue models. The Company's MicroOS operating system is the software foundation for the Company's DVAP (Digital Video/Audio Platform) technology.

    EDigital has four main key solutions and technologies that comprises the company.

    • eVU: "A studio-approved portable media player, utilizing proprietary encryption technology to safeguard content on internal storgage devices". (Source)
    • Nunchi: "Nunchi is a technology which retrieves data from an array of existing mobile phone sensors and uses this information to recognize, understand and affect interactions among people". (Source)
    • Flash-R Patent Portfolio: "e.Digital's Flash-R™ patent portfolio contains fundamental technology essential to the utilization of flash memory in today's large and growing portable electronic products market." (Source)
    • microSignet: "Cloud computing models allow access to as much or as little of services or media content as users want. Significant innovations in virtualization and distributed computing, as well as improved access to high-speed Internet have accelerated interest in cloud models. However, cloud computing's value is only as good as the certainty of the systems on either side of the cloud. microSignet addresses this issue directly by relying on the unique identification of the hardware components that process and store high value content, such as applications, sensitive documents, motion pictures, music, video games, and more. Because of the unique microSignet 'fingerprints', the services and media can be fully secured". (Source)

    Key Thesis Item:

    EDigital's recent settlement with Apple is a potential game changer for the company.

    The Settlement:

    Recently on December 18, 2013, eDigital and Apple (NASDAQ:AAPL) settled their lawsuit and all respective claims surrounding the case. Agoracom.com and InvestorHub.com posted the pacer document after it was posted.

    UNITED STATES DISTRICT COURT

    SOUTHERN DISTRICT OF CALIFORNIA

    e.Digital Corporation,

    Plaintiff,

    v.

    Apple Inc.,

    Defendant.

    Case No. 3:13-cv-00785-DMS-WVG

    ORDER GRANTING JOINT

    MOTION FOR VOLUNTARY

    DISMISSAL OF CLAIMS AND

    COUNTERCLAIMS

    Assigned to the Honorable

    Judge Dana M. Sabraw

    Ctrm: 13A (Annex)

    ORDER OF DISMISSAL

    On this day, Plaintiff e.Digital CORP. and Defendant APPLE INC.

    announced to the Court that they have settled their respective claims for relief

    asserted in this cause. The Court, having considered this request, is of the opinion

    that their request for dismissal should be granted.

    IT IS THEREFORE ORDERED that all claims for relief asserted against

    APPLE INC. by e.Digital CORP. herein are dismissed, with prejudice, and all

    counterclaims for relief against e.Digital CORP. by APPLE INC. are dismissed

    without prejudice; and

    IT IS FURTHER ORDERED that all attorneys' fees, costs of court and

    expenses shall be borne by each party incurring the same.

    Signed this 18th day of December 2013.

    UNITED STATES DISTRICT JUDGE

    Analysis:

    One of the key items standing out from this case is the fact that Apple settled. Apple rarely settles IP suits, especially with smaller companies. This speaks to the strength in eDigital's case and how Apple wanted this to be settled rather than take the full trial route. If Apple saw the value in eDigital's asserted technology, then eDigital will have less of a problem asserting it against other companies. This is due to the fact that Apple is one of the largest technology companies in the world and would not have settled unless eDigital's technology was sound and they were infringing on it.

    There are two ways to take this lawsuit, leading my to assert to readers and potential investors to stay on the sidelines until more clarity is released. The reason for this is that Apple has no reason to settle on terms that are unfavorable to them. As such, Apple may have provided for a walk-away settlement that validates eDigital's technology, although is cheaper than the legal fees involved with litigating over the course of the coming years.

    This landscape would be beneficial to both companies. EDigital does not get the huge settlement they wanted, although their technology is in fact validated by one of the largest technology companies in the world. This can lead eDigital to assert its technology against other companies with the backing of Apple's validation. On Apple's side, they receive a settlement for a potential lengthy and costly lawsuit that is cheaper to settle and walk away from.

    The above fact can be seen in eDigital's filing of 39 new lawsuits on December 11, 2013. Although before the settlement with Apple, eDigital's team may have seen the end of the tunnel and filed these suits knowing that Apple's validation would back their technology moving forward.

    EDigital's settlement with Apple is likely not a lucrative jackpot, although it paves the way for eDigital to assert its IP more easily in the future through the settlement and validation by Apple.

    eDigital's Past and Future:

    EDigital has not been without its share of settlements in the past, including settling with Creative Labs on May 20, 2013. This settlement dealt with eDigital's key Flash-R patent portfolio that is comprised of technology related to the use of flash memory in the large and growing portable electronics market.

    EDigital introduced the first portable recovered with removable flash memory in 1993 - demonstrating the company's over 20 year history in the flash memory market. eDigital holds that its patent portfolio is essential to many consumer electronics products that utilize flash memory including cell phones, digital cameras, camcorders, PDAs and other popular devices.

    EDigital is also enforcing other technologies in addition to its Flash-R portfolio. The company is also executing a licensing strategy for its Nunchi(NYSE:R) patent portfolio. EDigital has retained IPmetrics as a patent licensing consultant to target strategic partners to license their Nunchi(R) portfolio for context and interpersonal awareness systems technologies. This is a very interesting patent portfolio comprising futuristic technologies.

    "Nunchi is a technology which retrieves data from an array of existing mobile phone sensors and uses this information to recognize, understand and affect interactions among people. Nunchi based services utilize cloud-based servers, existing communication networks, sensor fusion, adaptive algorithms and relational databases to understand and anticipate the needs of people. The actual effect of Nunchi ranges from simplistic tasks such as communication screening (based on the user's availability and the nature of the call) to much more complex tasks such as optimizing a user's interactions and activities to enrich their lives." (Source)

    EDigital's Nunchi patent portfolio can become very useful and lucrative in the future if context awareness, communication screening and optimizing a user's interactions reach and flourish in the consumer marketplace.

    Risks:

    EDigital has appealed an adverse ruling in October that could have hampered the company's ability to assert some of it key patents. On October 9, 2013, the company appealed a collateral estoppel ruling that attached to eDigital's various cases to assert its Flash-R patent portfolio. A successful appeal would reverse the collateral estoppel ruling and would require the court to hold a new claim construction hearing on the disputed terms on the '108 and '774 patents.

    It should be noted that this did not prevent a settlement with Apple or any of cases filed after this ruling. The company's key Flash-R patent portfolio is only protected through 2016, so they company will have to assert the portfolio soon, as it is doing now. Afterwards, the company can sue those infringing for past damages within the time constraints. I would expect the company to expand its operations after this date - such as to its microSignet division which has recently been introduced.

    Conclusion:

    EDigital's settlement with Apple is an extraordinary feat, as Apple rarely settles an IP case - let alone with a smaller player in the market. This removes significant risk from EDigital moving forward as a loss in the court room could have been catastrophic for the small company. The settlement is likely small as Apple likely settled to avoid the more costly legal fees involved with a full blown case. Although the settlement affirms eDigital's technology so it can assert it against other infringers with Apple's validation, it removes the risk of losing the case at trial and it removes potentially costly legal fees with an undisclosed timeline.

    EDigital has some very interesting technologies under its belt - as contextual awareness is a very intriguing area that may come to market in the future. The company's long history of flash memory speaks to its successful settlements with many defendants moving forward. Being a microcap stock, eDigital could move easily on positive news. Although I would caution investors to wait on the sidelines until more is known regarding the company's future actions and to the depth of the settlement with Apple. I would assert to readers and potential investors that the settlement with Apple has the potential to be a game-changer, although to keep eDigital on your watchlist pending research instead of pulling the trigger right away.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: This article is informational and not a recommendation to buy or sell any security. This article is informational and in my own personal opinion.

    Themes: long-ideas Stocks: AAPL, EDIG
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Comments (6)
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  • Quoth the Raven
    , contributor
    Comments (2070) | Send Message
     
    Nice research, nice read.
    27 Dec 2013, 12:03 PM Reply Like
  • Tom Shaughnessy
    , contributor
    Comments (1106) | Send Message
     
    Author’s reply » Thank you QTR!
    27 Dec 2013, 02:57 PM Reply Like
  • danbre1
    , contributor
    Comments (31) | Send Message
     
    Well written. Especially appreciate the caution on jumping in until the air clears a bit and a future direction for this company breaks through the morning fog.
    6 Jan, 08:02 PM Reply Like
  • Tom Shaughnessy
    , contributor
    Comments (1106) | Send Message
     
    Author’s reply » Thanks Dan, I appreciate your comment
    6 Jan, 08:05 PM Reply Like
  • platonicbomb
    , contributor
    Comments (1124) | Send Message
     
    Interesting. Do we know why eDigital settled? Is it possible that the potential award would not have made up for attorney fees?

     

    It would be interesting to know how much they were suing for before the settlement.
    7 Jan, 01:03 AM Reply Like
  • John P Pueseletter
    , contributor
    Comment (1) | Send Message
     
    I have watched EDIG for some time and followed the litigation closely. EDIG recently reported 7 settlements from this litigation in their financials and the average per company appears to be around $80,000. This is far less than nuisance value and those settlements involved more patents. I would be skeptical that even 30-40 settlements would generate $1 million and with 300 million shares outstanding this # would not move the needle. Then I doubt they could repeat it. As to their "NUNCHI" technology it has been out there since the company said they were looking for partners in March of 2011. Most of EDIGs businesses never materialize and are simply replaced with new "businesses". To keep investors strung along EDIG recently announced their "Microsignet" technology. EDIG is definitely a company you should wait and see actual results before buying. The company has appeared to be on the verge of success for well over 10 years. Seems like more than just "bad luck".
    20 Jan, 11:50 AM Reply Like
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