On Track Innovations: Management Under Attack

| About: On Track (OTIV)

Rosh Pina, a town in northern Israel, is the home of On Track Innovations (NASDAQ:OTIV). The company headquarters is a modern, state of the art facility, and offers employees a first-class work environment. Oded Bashan, the company's chairman and CEO, is a beloved father figure to OTIV's employees, and when employment vacancies appear, they are filled quickly.

Unfortunately, this picture of Oded Bashan is not the one perceived by the investment community. After 20 years in business, the company has not shown a profit from operational revenues. Five years ago, Ohad Bashan, Oded's son, become company President. Operational revenues for the past 5 years have grown 6% (compounded annually). Would you consider this growth rate acceptable for a micro cap company? I don't.

The company was the first company to enter the Near Field Communications (NFC) industry and has developed over 100 patents and patents pending. Unfortunately, the company has been ineffective in its marketing efforts. For the past 5 years, the company has made little effort to develop the United States market. Ohad Bashan temporarily relocated to the United States in October of 2011 to "analyze" and rejuvenate this market, and is returning to Israel in July, 2012, having hired 3 employees to market the company's products in North America. In my opinion, this is like having a minor league team playing for the World Series.

The one question I ask myself every day is "If Oded and Ohad were running my company, would I still employ them after reviewing their dismal track record"? Fortunately shareholders in this company have a chance to make a difference. At the next annual meeting, shareholders will vote to keep/remove Oded Bashan from his dual role as company chairman and CEO.

"Under the Companies Law, neither the Chief Executive Officer of a public company nor a family member thereof or any person directly or indirectly subordinate to the Chief Executive Officer, may serve as a Chairman of the Board of Directors, and vice versa, unless authorized by a general meeting of the shareholders and then only for a period of time that does not exceed three years. On December 11, 2009, our shareholders authorized our Chairman, Oded Bashan, to act as our Chief Executive Officer for an additional three-year period." (taken from OTIV's 20F Filing April 11, 2012)

Moreover, Ohad's board seat will be up for reelection in December 2012. These two votes may surely fail, as the company has two dissident shareholders who have filed 13D filings. It is also important to note that shareholders defeated a proxy in March 2011 which would have allowed the company to defend against a hostile takeover. This proxy defeat, in my opinion, has put the company's board of directors and management on notice that shareholders are unhappy with the direction the company is taking. I'm concerned that Oded and Ohad's primary motivation is to maintain their control of the company in lieu of their fiduciary obligation to shareholders.

This whole scenario reminds me of Richard Nixon's presidency after the Watergate burglary was discovered. Management, like Nixon, is struggling to keep its lucrative job, stock options and bonus considerations, while shareholders would prefer a change. In my opinion, the company's board of directors is in a quandary. The Bashan's have not increased shareholder value. In fact, shareholder value has fallen from a high of $17 in 2005 to its current level of $1.55, and I attribute that to the current management team of OTIV. I do not see a near term catalyst in sight to improve shareholder value (with the exception of a law suit against T-Mobile whose settlement could be 2 years away). The simple mathematics says that under this management team, shareholder value has been destroyed.

I feel that management has mislead shareholders in recent Turkcell and Lukoil press releases by implying that these deals were full blown roll outs. When questioned during the Q1 2012 conference call, Ohad admitted that these were trials (for revenue purposes). For years, the Bashan's have told shareholders that they are making "progress," but there is no way to quantitatively measure this "progress." Furthermore, Ohad Bashan also stated in the same conference call that the company would not be sequentially profitable until 2015. (See comment #2 below)

The only real value I perceive is in OTIV's patent portfolio, an item which does not appear on the company's balance sheet, but which may be the key ingredient for all of NFC technology. In my opinion, OTIV will never achieve its full net worth with the Bashan management team, and I feel that it's in the best interest of the company's shareholders that OTIV be sold. DAYENU!

Disclosure: I am long OTIV.

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