The Nearmap Ltd (ASX: NEA) share price was in sensational form on Wednesday before being placed in a trading halt.
The aerial imagery technology and location data company’s shares were up 14.5% to $2.36 before the halt.
Why is the Nearmap share price rocketing higher?
The catalyst for the rise in the Nearmap share price on Wednesday was the release of a trading update after the market close yesterday.
That update revealed that the company’s strong performance has continued since the end of the first half.
As a result, management now expects to deliver annual contract value (ACV) of $128 million to $132 million in FY 2021.
This is up from its previous guidance of $120 million to $128 million and represents a 20% to 24% increase on FY 2020’s ACV of $106.4 million.
What about the trading halt?
Late this morning the Nearmap share price was placed in a trading halt at the company’s request.
Management made the request to allow the company time to respond to potential legal proceedings.
Nearmap didn’t provide any colour on what the legal proceedings relate to. However, it is worth noting that earlier this year J Capital appeared to suggest that legal proceedings from Eagleview were in the works.
This is what the short seller wrote:
“Roof reports” form the foundation of 41% of Nearmap’s sales in North America, to the insurance sector. Insurance companies routinely buy these reports to assess claims for damage caused by a weather event like wind or hail. Eagleview appears to be the only company with the technology to produce the reports, following successful legal action against Verisk for patent infringement of its roof-measurement technology in October 2019. Eagleview sells to 47 of the top 50 property and casualty insurers in the US. Nearmap’s 2019 $4.8 mln acquisition of Pushpin was designed to capture a technology for roof measurements that could make Nearmap more competitive in insurance claims.
That technology may infringe on Eagleview patents. According to a former senior manager at Eagleview, lawyers have issued warning letters to insurers. Should Nearmap be challenged, it may be required to pay a royalty to Eagleview, find a different way to do a map, or stop producing roof measurements and roof reports altogether in the US. This would shut Nearmap out of the $120 mln roof-measurement market. We believe Nearmap is required to indemnify insurance customers to make any sales. Not only does Nearmap stand to lose revenue, but it has substantial legal risk from the customers it has indemnified.
Nearmap admitted that it could not provide roof reports without infringing Eagleview’s technology, according to a former salesperson. That salesperson told us that Nearmap could not put in a tender for a U.S. federal government project called “Blue Roof” for post-disaster roofing because of this legal case. The RFP specifically requested roof reports, but the legal team at Nearmap said they could not do that as it infringed Eagleview’s patents. Eagleview has a browser platform where anyone can sign up and immediately purchase a roof report for $30.
Though, this is pure speculation at this point. Investors will need to wait for Nearmap’s response to know for sure.
The Nearmap share price will remain in its halt until the sooner of the release of an announcement or the commencement of trading on Friday.
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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd. The Motley Fool Australia has recommended Nearmap Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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