Patent Ruling Could Benefit On Track Innovations

On March 25, 2014, On Track Innovations (NASDAQ:OTIV) received a favorable summary judgment ruling in their patent infringement lawsuit against T-Mobile (NASDAQ:TMUS). The US Federal Judge Allison Nathan ruled that T-Mobile has infringed on OTIV's "043" patent, and that at trial, the jury will be instructed that TMobile has infringed on this patent. A complete copy of the ruling can be found at www.pacer.gov/. This ruling is monumental, and now either through licensing of the patent or through further litigation against other patent violators, OTIV stands to benefit from this very valuable patent.

In a recent Seeking Alpha Article, I discussed the "043" patent and industry standardization around this patent. Seeking Alpha readers should review Apple's (NASDAQ:AAPL) latest earnings conference call transcript, where Apple CEO Tim Cook talks about the future of Apple Pay. Cook believes Apple Pay is going to drive future growth of his company. What is Apple Pay? It is an NFC (near field communications) transaction between a smartphone and a reader. And who owns the railroad that this transaction rides on? The answer is On Track Innovations.

It stands to reason, that if the industry has standardized the way NFC will work, and all the telco's and cell phone manufacturers have designed their systems and products around this industry standard, then they must all be in violation of OTIV's "043" patent. Although this patent expires in December 2017, I believe that the adoption of NFC will move quickly in 2015 and accelerate exponentially in 2016 and beyond, this move driven by Apple's inclusion of NFC in their iPhone 6 and by Apple's desire to make Apple Pay the industry payment leader.

This move will help OTIV in two ways. First, OTIV can either license the "043" patent to the telco's and equipment manufacturers. Or, OTIV can vigorously defend it's patent rights against industry giants like AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S) and Apple. Remember the industry standardization, so if one of the telcos or equipment manufacturers is in violation of the "043" patent, they all must be in violation of the industry patent. The telcos and equipment manufactures have a clear choice, pay OTIV for the use of the railroad or be sued for trying to steal a ride.

Secondly, OTIV has been struggling with poor NFC reader sales and sales of other NFC related products. As the NFC industry accelerates and is more widely adopted, OTIV should start to see real revenue growth in late 2015 and beyond. Although it's important that OTIV's core business grow into profitability in the near future, I feel that investors should be more attuned as to the way and manner that OTIV is able to monitize this very valuable patent. Monetization of the "043" patent will define the success of OTIV.

With a current market cap of $51.4M, a tax loss carryforward (NOL) of $47M, a NFC railroad ownership of undetermined value, OTIV has now become a potential "buyout" candidate. Cell phone providers might want to have a competitive advantage over their rivals. One of these companies could decide to "own the railroad' and collect the usage fee for taking a "ride on the railroad." According to Juniper Research, NFC mobile payments is expected to reach $1.3T in revenue in 2017, and for the transaction to take place, it must occur on the standardized NFC railroad which I believe OTIV now owns.

There is certainly risk involved. A successful appeal of Judge Nathan's recent summary judgment ruling is a possibility. And then there is the cost of both present and future litigation, and an unfavorable outcome of future litigation. Furthermore, there is the question as to whether OTIV can grow it's core business to profitability. OTIV claims that it's reader business has suffered because their buyers were waiting for Apple to embrace NFC. Now that the iPhone 6 has NFC capability, more reader sales should be forthcoming.

OTIV's Wave product has also been a disappointment in generating sales growth. This product, discussed in a previous Seeking Alpha article, is designed to enable previous iphone versions as well as smart phones to gain NFC capability. Adoption of this product requires activation by a bank, and will be sold through the banking system. The company is in various trial stages of this product with leading banking institutions, and as NFC implementation becomes more apparent, consumers will have the opportunity to purchase this product from their bank and their cell phones will have NFC capability.

OTIV's stock has given back some of it's gains from the summary judgment ruling do to it's poor Q4 2014 financial results and to a conference call format that did not allow of a free flow of information between participants and the company. Investors in OTIV stock were not happy having to submit questions in advance of the conference call. And, although understandable, the "we cannot comment on pending litigation" put a damper to the hopes of investors who feel that the summary judgment win was huge.

The delay by Apple to put NFC into it's iPhone family, the long sales cycle for it's products, and a lack of what investor's perceive as poor execution on it's marketing plan have caused OTIV's stock to fall from a high of $5 in September 2014, to a low of $1.01 in March 2015. Add the recent resignation of CEO Ofer Tziperman to the mix, and the future may not be as bright as I predicted in the aforementioned article. Fortunately for OTIV, Judge Nathan's ruling in the T-Mobile patent infringement lawsuit has changed the environment, and I believe has made the "043" patent a valuable asset.

OTIV now owns the railroad, and this intangible and valuable asset will either lead OTIV to future revenue growth and profitability or OTIV will be sold, as the railroad could become a valuable asset to any company wanting to control NFC.

Disclosure: The author is long OTIV.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source : https://seekingalpha.com/article/3046046-patent-ruling-could-benefit-on-track-innovations

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