On Track Innovations: Primed For A Hostile Takeover

| About: On Track (OTIV)
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On Track Innovations (NASDAQ:OTIV) is a small Israeli company competing with Veriphone, Gemalto and others in the Near Field Communications and contactless payments industries. This 20-year-old company has a patent portfolio of 100 patents and patents pending. OTIV recently signed a $7M non exclusive licensing agreement for one of its patents, and initiated a patent infringement law suit against T-Mobile.

The company has been in business for 20 years, and has never been profitable. Led by its founder, CEO Oded Bashan, and Oded's son, Ohad, the company President, the company has given past guidance and goals that, in my opinion, have not been met.

Recently, two major investors, Mark Silk and Jerry Ivy, have filed 13D filings with the SEC. Both Silk and Ivy report an average cost of shares purchased around $3/share, and the stock has been trading well below the $3 price investors paid for a secondary offering in February 2011.

In January, 2012, the company amended its poison pill package, and in February 2012, notified shareholders of a special meeting to increase the company's authorized shares in order to be able to fund the poison pill defense. Shareholders, who have seen their investment go from a high of $17 in 2006 to lows of $1 in December 2011, soundly rebuked management and defeated this proxy.

According to the company's last quarterly report, OTIV has approximately $1 per share cash equivalents, and an Intellectual Property portfolio of unknown proportions. When company president Ohad Bashan was asked during the Q4 2011 conference call what he thought the company's intellectual property was worth, he said he had no idea. Conservative estimates for the intellectual property value are $3/share, and adding this to the $1/share cash equivalents, you have a $4/share value, which is far above the $1.41 price per share that the stock closed on 03/23/2012. And the company's enterprise value of $26M is well below its market capitalization of $43M.

In addition, OTIV stock trades at 0.5 times enterprise value to sales verses comparables trading at 2 times enterprise value to sales. It should be noted that current management or members of the board, whose share totals are far less than Silk's or Ivy's, have not recently purchased shares in the company, even though the company has completed a previously announced share repurchase program.

The fact that the two largest shareholders have become activists is an indication that this valuation is way too cheap. And, with such a robust intellectual property portfolio worth millions, in my opinion, two dissident shareholders, a falling price per share and an indefensible poison pill defense, I feel that OTIV is ripe for a hostile takeover, or at least a forced sale by the dissident shareholders.

Disclosure: I am long OTIV.