On Track Innovations (OTIV) began 2012 with nine directors listed on it's company website. Today, the website lists only six directors. The terms of three directors, Ohad Bashan, Ora Setter, and Eliezer Manor have expired. I believe that these three board seats will be filled at the company's annual meeting in late 2012. Also, under Israeli company law, a public company has to have one female director, and with the departure of Ora Setter, I believe OTIV is in violation of Israeli company law. The following was taken from the November 2009 proxy solicitation:
|3.||To re-appoint Dr. Ora Setter to serve as an external director of the Company for an additional three-year term effective August 25, 2009 (in compliance with the Israeli Companies Law requiring that a female external director shall be elected if all other directors are male).|
When questioned during the Q2 2012 financial results conference call, company Chairman and CEO Oded Bashan responded " I am telling you that the company is not in violation of the Israeli law." Further transcription was unclear, but Oded did say that this situation would be cleared up at the next shareholder meeting.
Furthermore, the dual role of Oded Bashan as company CEO and chairman of the board will expire in December, 2012, and under Israeli company law, shareholders will have to vote for Oded's reelection to this position, should he decide to keep his dual role.
In 2012, OTIV has announced only one significant revenue producing contract, an electronic immigration control system for Panama.
Three insignificant EasyPark contracts and two NFC reader contracts were also announced. Revenue from EasyPark sales takes at least 2 years to appear on the company's balance sheet, and the low profit margin reader contracts won't generate revenue until late 2012. After OTIV announced an EasyPark contract with the city of Dover, NH, I contacted Bill Simons, Parking Manager, Dover Police Department Parking Bureau to inquire how many parking meters were in this city. Simons responded "SIXTY NINE". There are an addition 1000+ parking spaces in Dover. On average, the city enjoys a 60% parking utilization rate. Like the recent association with Wright Express, this is just another meaningless press release by OTIV.
After reviewing the recent sales awards of competitors like Gemalto (GTOMY.PK) and Veriphone (PAY), it's very evident that OTIV is a laggard in the contractless payment marketplace. Both competitors have increased their sales year over year for the past six years, while OTIV has showed negative sales growth for the past two years. Reported sales for Gemalto and Veriphone in 2006 were 1.695 Billion euros and $581M respectively, while in 2006 OTIV report revenue of $40M. Sales for the three companies in 2011 were 2B+euros (GTOMY), $1.3B and $53.1M which included the $7M licensing agreement. Taking away the licensing agreement, OTIV has shown little or no growth from it's continuing operations.
Further evidence of OTIV's lack of growth is this mornings disappointing Q2 2012 financial results. Overall revenues were down approximately $5M from the previous quarter's revenue of $12.6M, and the company reported 6 month revenue down over 24%. Commenting on the company's weak performance, Oded Bashan said "We are disappointed with the results for the first half of the year". These are similar words used by Bashan year after year, quarter after quarter. Bashan further added the company mantra of "making progress" in implementing OTIV's long term goals. Long term investors want to see results, not progress.
In the above mentioned conference call, the company added a new line item to the balance sheet, restricted cash. This $3M addition approximates executive compensation should the current management team be terminated. It appears that management see the handwriting on the wall.
OTIV's current press releases always point out the company has over 100 patents and patents pending. Many of these patents were awarded when NFC was in it's infancy, and could expire within the next 3-4 years. The company has only been able to monetize one significant patent with an "unnamed" multi billion dollar company, and it's patent infringement lawsuit with TMobile (DTEGY.PK) won't be decided until the spring, 2013.
When shareholders defeated a company proxy in March, 2012 to increase the number of authorized shares to defend a poison pill package, a clear message was sent to the company's board of directors and management that shareholders no longer support the company's objectives and want change. I do not believe that Oded Bashan can be reelected by shareholders to his position of CEO and chairman of the board. Why would any shareholder vote to retain a corporate officer whose company's share price has fallen from a high of $17.26 in 2006 to it's current price level of $1.18?
With a minimum of three board seats up for election at the next annual meeting, it is my opinion that a proxy battle is imminent. Investors Jerry Ivy and Marc Silk have 13D filings with the SEC, and appear to be extremely dissatisfied with company management. I do not believe that the board of directors has exercised it's fiduciary responsibility to monitor management and protect shareholder value.
This board has permitted management to operationally underperform year after year, and consequently shareholders have suffered. During the 6 year period 2005-2011, executive compensation for OTIV has increased 263%, while revenues for the same period increased 44%. Also, the shares outstanding for this period have increased 175%. Management gets paid for underperforming. It just doesn't make sense. A 92% decrease in the price per share from 2006 says it all. I believe a successful proxy battle for these board seats could precipitate a change in company management or the sale of the company. Either one of these signals would be great for OTIV's investors, and allow them to turn their investment "losses" into realized gains.
Disclosure: I am long OTIV.