UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

(Mark One)

 

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from

__________ to __________

 

Commission file number 000-49877

 

ON TRACK INNOVATIONS LTD.
(Exact name of registrant as specified in its charter)

 

Israel   N/A
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel 1200001
(Address of principal executive offices)

 

+ 972-4-6868000
(Registrant’s telephone number)  

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None        

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     

 

Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    

 

Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐    No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 41,324,377 Ordinary Shares outstanding as of November 5, 2019.

 

 

  

 

 

 

ON TRACK INNOVATIONS LTD.

 

TABLE OF CONTENTS

 

Part I - Financial Information    
         
Item 1.   Financial Statements   1
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   2
         
Item 4.   Controls and Procedures   14
         
Part II - Other Information    
         
Item 1.   Legal Proceedings   15
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   16
         
Item 5.   Other Information   16
         
Item 6.   Exhibits   16
         
    Signatures   17

 

i

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES

 

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2019

 

(Unaudited)

 

1

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Financial Statements as of September 30, 2019

 

 

Contents

  

  Page
   
Interim Unaudited Condensed Consolidated Balance Sheets F-2 - F-3
   
Interim Unaudited Condensed Consolidated Statements of Operations F-4
   
Interim Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income F-5
   
Interim Unaudited Condensed Consolidated Statements of Changes in Equity F-6 - F-7
   
Interim Unaudited Condensed Consolidated Statements of Cash Flows F-8 - F-9
   
Notes to the Interim Unaudited Condensed Consolidated Financial Statements F-10 - F-27

 

F-1

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Balance Sheets

 

 

US dollars in thousands except share and per share data

 

    September 30,     December 31,  
    2019     2018  
             
Assets            
             
Current assets            
Cash and cash equivalents   $ 3,396     $ 4,827  
Short-term investments     1,905       1,078  
Trade receivables (net of allowance for doubtful accounts of $558 and $555 as of September 30, 2019 and December 31, 2018, respectively)     2,469       4,530  
Other receivables and prepaid expenses     1,602       2,060  
Inventories     4,366       3,527  
                 
Total current assets     13,738       16,022  
                 
Long-term restricted deposit for employees benefit     473       451  
                 
Severance pay deposits     404       375  
                 
Property, plant and equipment, net     3,693       5,033  
                 
Intangible assets, net     246       241  
                 
Right-of-use assets     1,930       -  
                 
Total Assets   $ 20,484     $ 22,122  

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 

F-2

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Balance Sheets

 

 

US dollars in thousands except share and per share data

 

    September 30,     December 31,  
    2019     2018  
             
Liabilities and  Equity            
             
Current Liabilities            
Short-term bank credit and current maturities of long-term bank loans   $ 2,553     $ 260  
Trade payables     4,857       4,712  
Other current liabilities     2,286       3,622  
                 
Total current liabilities     9,696       8,594  
                 
Long-Term Liabilities                
Long-term loans, net of current maturities     26       39  
Long-term liabilities due to operating leases, net of current maturities     1,204       -  
Accrued severance pay     948       853  
Deferred tax liability     393       445  
Total long-term liabilities     2,571       1,337  
                 
Total Liabilities     12,267       9,931  
                 
Commitments and Contingencies                
                 
Equity                
Shareholders’ Equity                
Ordinary shares of NIS 0.1 par value:                
Authorized: 50,000,000 shares as of September 30, 2019 and December 31, 2018; issued: 42,503,076 and 42,473,076 shares as of September 30, 2019 and December 31, 2018, respectively; outstanding: 41,324,377 and 41,294,377 shares as of September 30, 2019, and December 31, 2018, respectively     1,069       1,068  
Additional paid-in capital     225,117       225,022  
Treasury shares at cost - 1,178,699 shares as of September 30, 2019 and December 31, 2018     (2,000 )     (2,000 )
Accumulated other comprehensive loss     (1,172 )     (956 )
Accumulated deficit     (214,797 )     (210,943 )
Total Equity     8,217       12,191  
                 
Total Liabilities and Equity   $ 20,484     $ 22,122  

  

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 

F-3

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Operations

 

 

US dollars in thousands except share and per share data

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2019     *2018     2019     *2018  
                         
Revenues                        
Sales   $ 2,631     $ 4,760     $ 7,286     $ 13,353  
Licensing and transaction fees     1,234       1,339       3,708       3,997  
                                 
Total revenues     3,865       6,099       10,994       17,350  
                                 
Cost of revenues                                
Cost of sales     2,161       2,870       5,273       8,351  
Total cost of revenues     2,161       2,870       5,273       8,351  
                                 
Gross profit     1,704       3,229       5,721       8,999  
Operating expenses                                
Research and development     840       765       2,528       2,391  
Selling and marketing     1,193       1,591       3,798       4,700  
General and administrative     1,070       1,099       3,081       3,001  
Other (gain) expenses, net     (335 )     -       (335 )     70  
                                 
Total operating expenses     2,768       3,455       9,072       10,162  
                                 
Operating loss from continuing operations     (1,064 )     (226 )     (3,351 )     (1,163 )
Financial expenses, net     (93 )     (2 )     (199 )     (129 )
                                 
Loss from continuing operations before taxes on income     (1,157 )     (228 )     (3,550 )     (1,292 )
Income tax (expenses) benefit, net     (17 )     2       (25 )     267  
                                 
Net loss from continuing operations     (1,174 )     (226 )     (3,575 )     (1,025 )
Net (loss) income from discontinued operations     (36 )     42       (279 )     228  
                                 
Net loss     (1,210 )     (184 )     (3,854 )     (797 )
                                 
Basic and diluted net (loss) income attributable to shareholders per ordinary share                                
From continuing operations     (0.03 )     (** )     (0.09 )     (0.02 )
From discontinued operations     (** )     (** )     (** )     (** )
                                 
    $ (0.03 )   $ (** )   $ (0.09 )   $ (0.02 )
                                 
Weighted average number of ordinary shares used in computing basic and diluted net (loss) income per ordinary share     41,324,377       41,294,377       41,306,575       41,260,426  

 

* Reclassified to conform with the current period presentation, see Note 1C(2).

 

** Less than $0.01 per ordinary share.

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

 

F-4

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

 

 

US dollars in thousands

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2019     2018     2019     2018  
                         
Total comprehensive (loss) income:                        
Net (loss) income   $ (1,210 )   $ (184 )   $ (3,854 )   $ (797 )
Foreign currency translation adjustments     (254 )     44       (216 )     (210 )
                                 
Total comprehensive (loss) income   $ (1,464 )   $ (140 )   $ (4,070 )   $ (1,007 )

  

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 

F-5

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Changes in Equity

 

 

US dollars in thousands except number of shares

 

                            Accumulated              
                Additional     Treasury     other            
    Number of     Share     paid-in     Shares     comprehensive     Accumulated     Total  
    Shares issued     capital     capital     (at cost)     Income (loss)     deficit     equity  
                                           
Balance as of June 30, 2018     42,473,076     $ 1,068     $ 224,903     $ (2,000 )   $ (945 )   $ (211,293 )   $ 11,733  
                                                         
Changes during the three months period ended September 30, 2018:                                                        
                                                         
Stock-based compensation     -       -       65       -       -       -       65  
Exercise of options     -       -       -       -       -       -       -  
Foreign currency translation adjustments     -       -       -       -       44       -       44  
Net loss     -       -       -       -       -       (184 )     (184 )
Balance as of September 30, 2018     42,473,076     $ 1,068     $ 224,968     $ (2,000 )   $ (901 )   $ (211,477 )   $ 11,658  
Balance as of June 30, 2019     42,503,076     $ 1,069     $ 225,111     $ (2,000 )   $ (918 )   $ (213,587 )   $ 9,675  
                                                         
Changes during the three months period ended September 30, 2019:                                                        
                                                         
Stock-based compensation     -       -       6       -       -       -       6  
Foreign currency translation adjustments     -       -       -       -       (254 )     -       (254 )
Net loss     -       -       -       -       -       (1,210 )     (1,210 )
Balance as of September 30, 2019     42,503,076     $ 1,069     $ 225,117     $ (2,000 )   $ (1,172 )   $ (214,797 )   $ 8,217  

 

(*) See Note 10D.

 

F-6

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Changes in Equity

 

 

US dollars in thousands except number of shares

  

                            Accumulated              
                Additional     Treasury     other            
    Number of     Share     paid-in     Shares     comprehensive     Accumulated     Total  
    Shares issued     capital     capital     (at cost)     Income (loss)     deficit     equity  
                                           
Balance as of December 31, 2017     42,353,077     $ 1,064     $ 224,758     $ (2,000 )   $ (691 )   $ (210,680 )   $ 12,451  
                                                         
Changes during the nine month period ended September 30, 2018:                                                        
                                                         
Stock-based compensation     80,000 (*)     3       177       -       -       -       180  
Exercise of options     39,999       1       33       -       -       -       34  
Foreign currency translation adjustments     -       -       -       -       (210 )     -       (210 )
Net loss     -       -       -       -       -       (797 )     (797 )
Balance as of September 30, 2018     42,473,076     $ 1,068     $ 224,968     $ (2,000 )   $ (901 )   $ (211,477 )   $ 11,658  
                                                         
Balance as of December 31, 2018     42,473,076     $ 1,068     $ 225,022     $ (2,000 )   $ (956 )   $ (210,943 )   $ 12,191  
                                                         
Changes during the nine month period ended September 30, 2019:                                                        
Stock-based compensation     30,000 (*)     1       95       -       -       -       96  
Foreign currency translation adjustments     -       -       -       -       (216 )     -       (216 )
Net loss     -       -       -       -       -       (3,854 )     (3,854 )
Balance as of September 30, 2019     42,503,076     $ 1,069     $ 225,117     $ (2,000 )   $ (1,172 )   $ (214,797 )   $ 8,217  

 

(*) See Note 10D.

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 

F-7

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Cash Flows

 

 

US dollars in thousands

 

    Nine months ended
September 30,
 
    2019     *2018  
Cash flows from continuing operating activities            
Net loss from continuing operations   $ (3,575 )   $ (1,025 )
Adjustments required to reconcile net loss to  net cash used in continuing operating activities:                
Stock-based compensation related to options and shares issued to employees and others     96       180  
Depreciation and amortization     951       978  
Deferred tax, net     (25 )     (360 )
Gain on sale of property and equipment     (328 )     (25 )
Accrued interest and linkage differences, net     (48 )     -  
                 
Changes in operating assets and liabilities:                
Accrued severance pay, net     66       (19 )
Decrease in trade receivables, net     1,576       1,377  
Decrease (increase) in other receivables and prepaid expenses     395       (255 )
Increase in inventories     (879 )     (381 )
Increase (decrease) in trade payables     506       (263 )
Decrease in other current liabilities     (585 )     (151 )
Net cash (used in) provided by continuing operating activities     (1,850 )     56  
                 
Cash flows from continuing investing activities                
                 
Purchase of property and equipment     (433 )     (467 )
Proceeds from sale of property and equipment     1,102       52  
Change in short-term investments, net     (978 )     1,195  
Investment in capitalized certification costs     (156 )     (92 )
Proceeds from restricted deposit for employees benefit     10       8  
Net cash (used in) provided by continuing investing activities     (455 )     696  
                 
Cash flows from continuing financing activities                
Increase (decrease) in short-term bank credit, net     2,636       (3,449 )
Repayment of long-term bank loans     (261 )     (979 )
Proceeds from exercise of options and warrants     -       34  
Net cash provided by (used in) continuing financing activities     2,375       (4,394 )
                 
Cash flows from discontinued operations                
Net cash (used in) provided by discontinued operating activities     (1,397 )     836  
                 
Total net cash (used in) provided by discontinued operations     (1,397 )     836  
                 
Effect of exchange rate changes on cash and cash equivalents     (277 )     (187 )
                 
Decrease in cash, cash equivalents and restricted cash     (1,604 )     (2,993 )
                 
Cash, cash equivalents and restricted cash - beginning of the period     5,105       7,799  
                 
Cash, cash equivalents and restricted cash - end of the period   $ 3,501     $ 4,806  

 

(*) Reclassified to conform with the current period presentation, see Note 1C(2).

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 

F-8

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont’d)

 

 

US dollars in thousands

 

    Nine months ended
September 30,
 
    2019     2018  
Supplementary cash flows activities:            
             
Cash paid during the period for:            
Interest paid   $ 44     $ 112  
Income taxes paid   $ 187     $ 43  

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 

F-9

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 1 – Organization and Basis of Presentation

 

A. Description of business

 

On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together, the “Group”) are principally engaged in the field of design and development of cashless payment solutions.

 

The Company’s ordinary shares are listed for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 30, 2019).

 

At September 30, 2019, the Company operates in two operating segments: (a) Retail and Mass Transit Ticketing, and (b) Petroleum. See Note 11. During 2018, the Company sold its medical smart cards operation – see Note 1C(2).

 

B. Interim Unaudited Financial Information

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

In the opinion of management, all adjustments considered necessary for a fair statement, consisting of normal recurring adjustments, have been included. Operating results for the nine month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Interim Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.

 

C. Divestiture of operations

 

1. In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property (“IP”) relating to its Smart ID division, for a total purchase price of $10,000 in cash and an additional $12,500 subject to performance-based milestones. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.

 

F-10

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 1 – Organization and Basis of Presentation (cont’d)

 

C. Divestiture of operations (cont’d)

 

On April 20, 2016, the purchaser of the Smart ID division, SuperCom Ltd. (“SuperCom”), and the Company entered into a settlement agreement resolving certain litigation between SuperCom and the Company pursuant to which SuperCom paid the Company $2,050 and agreed to pay the Company up to $1,500 in accordance with and subject to a certain earn-out mechanism. In November 2017, the Company commenced an arbitration procedure with SuperCom, in which the Company claims that additional earn-out payments have not been paid to the Company. SuperCom raised issues against the Company during the arbitration procedure. An arbitration decision was issued on December 24, 2018 in the Company’s favor and denied SuperCom’s claims. The Arbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that the Company is entitled to receive, and to pay the Company accordingly, or otherwise pay the Company the maximum earn-out amount, which equals $1,500 minus the earn-out amounts that were already paid by SuperCom to the Company. As of the date hereof, the said arbitration verdict has been validated as a court verdict, and the Company is currently taking actions to enforce it.

 

The Company records the earn-out payments only when the consideration is determined to be realizable. The Company did not record or receive any contingent consideration during the nine months ended September 30, 2019 and 2018.

 

2. In December 2018, the Company completed the sale of its medical smart cards operation (“Medismart”) (formerly part of the Company’s “Other segment”) to Smart Applications International Limited (“Smart”) for a total price of $2,750. The Company has determined that the sale of the Medismart business qualifies as a discontinued operation. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations (see also Note 8). All prior periods’ information has been reclassified to conform with the current period’s presentation.

 

D. Events in the reporting period

 

1. On May 24, 2019, ASEC S.A. (Spolka Akcyjna), the Polish subsidiary of the Company (hereinafter – “ASEC”), entered into a loan agreement with PKO Bank Polski, a Polish bank (hereinafter – “the Lender”). The agreement provides that the Lender will grant an overdraft facility to ASEC in the amount of $2,000. On May 24, 2019 the Lender loaned to ASEC the full amount of the loan, secured by certain assets of ASEC (hereinafter – “the Secured Loan”). The Secured Loan matures on May 23, 2020. The loan will be payable in full on maturity (with option of early repayment by ASEC) and the interest will be paid on a monthly basis. The Secured Loan bears interest at an annual interest rate based on 1-month LIBOR plus a margin of 1.8%, or currently approximately 3.8% in total. The agreement includes customary events of default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the agreement, etc. If an event of default occurs, the Lender may reduce the amount of the Secured Loan, demand an additional security or terminate the agreement.

 

F-11

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 1 – Organization and Basis of Presentation (cont’d)

 

D. Events in the reporting period (cont’d)

 

2. In January 2019, the Company signed agreements pursuant to which the Company will lease offices in Yokne’am and in Rosh Pina, Israel (in lieu of the current leased headquarters building in Rosh Pina). The operating lease periods of those buildings in Yokne’am and in Rosh Pina are five years and four years, respectively (excluding the extension-periods, as mentioned in the agreements), and will commence in the fourth quarter of 2019 and commenced in the third quarter of 2019, respectively. The total annual rent expenses of both offices, including management fees and excluding construction costs-reimbursement, are expected to be approximately NIS 650 ($187). The construction costs-reimbursement are expected to be approximately NIS 3,450 ($990) that will be paid during the lease period.

 

3. In March 2019, OTI Petrosmart (Pty), Ltd., the South African subsidiary (hereinafter – “Petrosmart”), entered into an agreement pursuant to which Petrosmart agreed to sell its head office in Cape Town, South Africa, to a third party for consideration of Rand 15,500 (approximately $1,100), and Petrosmart agreed to lease back this building for its current operations. The sale has been completed and the operating lease commenced during the third quarter of 2019. The leaseback period is three years. The annual rent for the first year is approximately Rand 1,800 (approximately $119) and will be increased by 8.5% each year. Petrosmart has the right to extend the lease by two years. The Company recognized a profit in the amount of approximately $328 during the third quarter in 2019 due to the sale of the building. This profit is presented within ‘other (gain) expenses, net’ in the statements of operations.

 

The Company does not record right-of-use asset and operating lease liability regarding the building in Yokne’am (Israel), as mentioned above, in its consolidated financial statements as of September 30, 2019, due to the fact that the commencement date of the lease period is subsequent to the balance sheet date – see also Note 2A. The Company expects an increase of approximately $1,600 in the right-of-use assets and in the lease liabilities on the first-time-recognition in this lease.

 

Note 2 – Significant Accounting Policies

 

Except as described below, these interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

A. Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes Accounting Standards Codification (“ASC”) 840, Leases. This ASU requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for most leases, whereas until December 31, 2018, only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Right-of-use assets represent company’s right to use an underlying asset for the lease term and lease liabilities represent company’s obligation to make lease payments arising from the lease. Operating and finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.

 

F-12

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 2 – Significant Accounting Policies (cont’d)

 

A. Recently Adopted Accounting Pronouncements (cont’d)

 

In addition, the definition of a lease in the ASU has been revised with respect to when an arrangement conveys the right to control the use of the identified asset under the arrangement, which may result in changes to the classification of an arrangement as a lease. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. The ASU expands the disclosure requirements of lease arrangements.

 

The Company has adopted ASU 2016-02 commencing from January 1, 2019, under the effective date method. In accordance with the effective date method, comparative periods are not restated, and the Company needs to record a cumulative-effect adjustment within its accumulated deficit in the equity on January 1, 2019, without reclassification of previous financial statements. The new standard provides a number of optional practical expedients in transition. The Company elect the ‘package of practical expedients’, which permits the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard and also elect the practical expedient pertaining to the use-of hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company also elected the practical expedient to not separate lease and non-lease components for all of the Company’s leases, other than leases of real estate. Additionally, following the adoption of the new standard and in subsequent measurements, the Company applies the portfolio approach to account for the operating lease right-of-use assets and liabilities for certain leases and incremental borrowing rates.

 

The Company did not have a cumulative-effect adjustment to retained earnings as a result of the adoption of the new standard. The adoption of this standard does not have a material impact on the results of operations and cash flows. See Note 5 for the impact on the balance sheet as of September 30, 2019, and additional disclosures, as required by the new standard.

 

B. Recent accounting pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company currently does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements.

F-13

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 3 – Other Receivables and Prepaid Expenses

 

    September 30,     December 31,  
    2019     2018  
Government institutions   $ 234     $ 387  
Prepaid expenses     165       226  
Supplier advances     502       932  
Receivables under contractual obligations to be transferred to others (*)     427       349  
Other receivables     274       166  
    $ 1,602     $ 2,060  

 

(*) The Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities.

 

Note 4 – Other Current Liabilities

 

    September 30,     December 31,  
    2019     2018  
Employees and related expenses   $ 637     $ 1,042  
Accrued expenses     682       921  
Customer advances     110       141  
Short-term liabilities due to operating leases and current maturities **     732       -  
Other current liabilities     125       *1,518  
    $ 2,286     $ 3,622  

 

* See Note 6A(1).

 

** See Note 2A.

 

Note 5 – Leases

 

The Company leases a limited number of assets, mainly offices and cars for use in its operations. The Company adopted the new accounting standard ASC 842, “Leases”, and all the related amendments on January 1, 2019 and used the effective date as Company’s date of initial application.

 

As of September 30, 2019, right-of-use assets due to operating leases are $1,930 )as of January 1, 2019 - $1,572) and the liabilities due to operating leases are $1,936 (as of January 1, 2019 - $1,572), out of which $1,204 are classified as long-term liabilities and $732 are classified as current liabilities (see Note 4).

 

The Company includes renewal options that it is reasonably certain to exercise in the measurement of the lease liabilities. The remaining operating lease periods of the leases range from less than one year to six years as of September 30, 2019. The weighted average remaining lease term is 2.3 years as of September 30, 2019.

 

F-14

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 5 – Leases (cont’d)

 

The following is a schedule of the maturities of operating lease liabilities for the next five years as of September 30, 2019, and thereafter, as were taken into account in the calculation of the operating lease liabilities as of September 30, 2019:

 

Remainder of 2019   $ 233  
2020     661  
2021     511  
2022     362  
2023     184  
Thereafter     140  
Total leases payments     2,091  
Less - discount     155  
Operating lease liabilities   $ 1,936  

 

As of September 30, 2019, the weighted average discount rate of the operating leases is approximately 5.3%.

 

Operating lease costs and cash paid for amounts included in the measurement of the lease liabilities were approximately $236 and $602 during the three months and the nine months ended September 30, 2019, respectively. Operating lease costs include fixed payments and variable payments that depend on an index or rate. There are no other significant variable lease payments.

 

The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.

 

The following is a schedule of the maturities of operating lease liabilities for the next five years as of December 31, 2018, and thereafter, based on agreements that were signed as of December 31, 2018:

 

2019   $ 523  
2020     350  
2021     277  
2022     163  
2023     140  
Thereafter     156  
Total leases payments   $ 1,609  

  

F-15

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 6 – Commitments and Contingencies

 

A. Legal claims

 

1. In June 2013, prior to the Company’s divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania.  These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liabilities the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions, plus expenses and legal fees and ordering the Company to provide further financial details that might result in additional payments to Merwell.  The arbitration decision had been appealed and the appeal was denied on June 17, 2018. In order to collect the award, Merwell filed a motion against the Company and the Nazareth District Court issued a judgment requiring the Company to pay Merwell an amount of approximately NIS 5,080 (approximately $1,370) that was paid by the Company on January 8, 2019. As mentioned above, based on the agreement with SuperCom from April 2016 (which was granted an effect of a court judgment), SuperCom is liable for all the costs and liabilities arising out of this claim. On February 17, 2019, the Company initiated an arbitration process (the “Arbitration”) to collect from SuperCom the amount paid to Merwell which SuperCom failed to pay, and to assure that SuperCom will pay any additional amounts, if required in the future. On March 26, 2019, SuperCom filed a petition to the Tel-Aviv District Court, asking to order that the dispute will be conducted in Court and not in arbitration. On October 29, 2019, a hearing was conducted in court regarding SuperCom’s petition, and at the end of the hearing, following the court’s recommendation, SuperCom agreed to withdraw its petition. As a result, the court gave a verdict ordering that the Arbitration will continue. On the same day, the Company approached the arbitrator, asking to renew the Arbitration, and on October 30, 2019 the arbitrator scheduled a preliminary hearing.

 

The consolidated financial statements as of December 31, 2018, include a provision for the full amount paid. Despite the fact that, based on the assessment of the Company’s external legal counsel, the likelihood to succeed in the arbitration process (or other legal procedure in that matter) is high, the Company did not record an indemnification asset as of September 30, 2019 and December 31, 2018, in accordance with accounting standard ASC 450.

 

2. On June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration, with respect to the additional financial details that Merwell claims that the Company was ordered to provide according to the arbitration verdict from February 21, 2016, and additional payments that Merwell claims that the Company is obligated to pay Merwell. The said financial details refer to the quantity of smart driving licenses that Merwell claims were issued in the later period of a project in Tanzania in which Merwell claims to have provided services to the Company. Merwell claims that despite the Company’s failure to provide the details, Merwell obtained the details independently from other sources, and they indicate that the Company is obligated to pay Merwell an additional amount of $1,619. The Company rejects the details that were presented by Merwell and their validity, and also raised preliminary claims that this matter cannot be determined in arbitration, but only in court, since the relevant data is held by SuperCom, who is not a party to the arbitration agreement with Merwell, but issued the licenses in the relevant period and therefore is a necessary party to the dispute. The Company filed an application to the arbitrator, and on August 8, 2019, the arbitrator determined that the Company’s procedural claims should be heard and determined in court. Following that decision, on September 8, 2019, the Company filed a petition to the Tel-Aviv District Court, asking it to order that Merwell’s claims in the complementary procedure will be heard in court and not in arbitration. On October 22, 2019, Merwell submitted its response to the court. As of the date of this report, a hearing in the petition has not yet scheduled. Based on the assessment of the Company’s external legal counsel, given the preliminary stage of the procedure, it is difficult, at this point, to estimate the chances of Merwell’s claims for a complementary arbitration verdict.

 

F-16

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 6 – Commitments and Contingencies (cont’d)

 

A. Legal claims (cont’d)

  

3. In October 2013, a financial claim was filed against the Company and its then French subsidiary, Parx France (in this paragraph, together, the “Defendants”), in the Commercial Court of Paris, France (in this paragraph, the “Court”). The sum of the claim is €1,500 (approximately $1,708) and is based on the allegation that the plaintiff sustained certain losses in connection with Defendants not granting the plaintiff exclusive marketing rights to distribute and operate the Defendants’ PIAF Parking System in Paris and the Ile of France. On October 25, 2017, the Court issued its ruling in this matter dismissing all claims against the Company but ordering Parx France to pay the plaintiff €50 ($57) plus interest in damages plus another approximately €5 ($6) in other fees and penalties. The Company offered to pay the amounts mentioned above to the plaintiff in consideration for not filing future appeals. The Plaintiff rejected this offer and filed an appeal against Parx France and the Company claiming the sum of €503 ($573) plus interest and expenses. The Company will submit its answer to the appeal by November 7, 2019, and the appeal hearing is scheduled for December 5, 2019. Based on the assessment of the Company’s external legal counsel, the Company’s management is of the opinion that the chances of the appeal being approved against the Company are low.

 

4. In July, 2019, the Company received a request (the “Request”), to allow a petitioner to submit a class action, which concerns the petitioner’s claims that, inter alia, through the EasyPark card, drivers are permitted to exceed the quota of permitted hours in accordance with the instructions of various local authorities in Israel. The Request was submitted against a company (the “Buyer’s Company”) incorporated by the buyer of the assets (including the parking activity) of the Israeli subsidiaries of the Company (the “Company’s Subsidiaries”) and against two other companies that operate technological means for payment for public parking spaces scattered throughout the cities. Since the majority of potential claims against the Company’s Subsidiaries relate to the period following the sale of the Company’s Subsidiaries’ assets, including the parking activity, it appears that the Company’s exposure through this channel is limited. Furthermore, even if payment will be required, the buyer would be liable for the majority of such payment. Therefore the Company will not participate in such procedure at this stage. Based on the assessment of the Company’s external legal counsel, the exposure of the Company cannot be assessed at this point.

 

B. Guarantees

 

As of September 30, 2019, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $387. The expiration dates of the guarantees range from April 2020 to September 2021.

 

F-17

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 7 – Revenues

 

Disaggregation of revenue

 

The following tables disaggregates the Company’s revenue by major source based on categories that depict its nature and timing as reviewed by management for the nine months and the three months ended September 30, 2019:

 

    Nine months ended September 30, 2019  
   

Retail and

Mass Transit

Ticketing

    Petroleum     Total  
                   
Cashless payment products (A)   $ 4,437     $ -     $ 4,437  
                         
Complete cashless payment solutions (B):                        
Sales of products (B1)     646       1,439       2,085  
Licensing fees, transaction fees and services (B2)     3,522       950       4,472  
      4,168       2,389       6,557  
Total revenues   $ 8,605     $ 2,389     $ 10,994  

  

       
    Nine months ended September 30, 2018*  
   

Retail and

Mass Transit

Ticketing

    Petroleum     Total  
                   
Cashless payment products (A)   $ 6,710     $ -     $ 6,710  
                         
Complete cashless payment solutions (B):                        
Sales of products (B1)     2,880       2,882       5,762  
Licensing fees, transaction fees and services (B2)     3,817       1,061       4,878  
      6,697       3,943       10,640  
Total revenues   $ 13,407     $ 3,943     $ 17,350  

 

* Reclassified to conform with the current period presentation, see Note 1C(2).

 

F-18

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 7 – Revenues (cont’d)

 

Disaggregation of revenue (cont’d)

 

    Three months ended September 30, 2019  
   

Retail and

Mass Transit

Ticketing

    Petroleum     Total  
                   
Cashless payment products (A)   $ 1,697     $ -     $ 1,697  
                         
Complete cashless payment solutions (B):                        
Sales of products (B1)     49       603       652  
Licensing fees, transaction fees and services (B2)     1,189       327       1,516  
      1,238       930       2,168  
Total revenues   $ 2,935     $ 930     $ 3,865  

 

    Three months ended September 30, 2018*  
   

Retail and

Mass Transit

Ticketing

    Petroleum     Total  
                   
Cashless payment products (A)   $ 2,013     $ -     $ 2,013  
                         
Complete cashless payment solutions (B):                        
Sales of products (B1)     1,520       935       2,455  
Licensing fees, transaction fees and services (B2)     1,248       383       1,631  
      2,768       1,318       4,086  
Total revenues   $ 4,781     $ 1,318     $ 6,099  

 

* Reclassified to conform with the current period presentation, see Note 1C(2).

 

F-19

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 7 – Revenues (cont’d)

 

Performance obligations

 

Below is a listing of performance obligations for the Company’s main revenue streams:

 

A. Cashless payment products –

 

The performance obligation is the selling of contactless payment products. Most of those products are Near Field Communication (NFC) readers. For such sales the performance obligation, transfer of control and revenue recognition occur when the products are delivered.

 

Below is a listing of performance obligations for the Company’s main revenue streams (cont’d):

 

B. Complete cashless payment solutions –

 

The complete solution includes selling of products and complementary services, as follows:

 

1. Sales of products

 

Selling of contactless payment products (see A above) together with payment gateways and machine-to-machine controllers.

 

Selling of petroleum payment solutions including site and vehicle equipment.

 

For such sales, the performance obligation, transfer of control and revenue recognition occur when the products are delivered.

 

2. Licensing fees, transaction fees and services -

 

The types of arrangements and their main performance obligations are as follows:

 

To provide terminal management system licensing for software that is responsible for remote terminal management and cloud-based software licensing which provide data insights. For such services, the revenue recognition occurs as the services are rendered since the performance obligation is satisfied over time.

 

To enable loading and sale of electronic contactless and paper cards. For such transaction fees, the revenue recognition occurs on the transaction date.

 

To provide technical and customer services for products. For such services, the performance obligation is satisfied over time and therefore revenue recognition occurs as the services are rendered.

 

The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations. The cost to the Company of this warranty is insignificant.

 

F-20

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 7 – Revenues (cont’d)

 

Performance obligations (cont’d)

 

Contract balances

 

    September 30,     December 31,  
    2019     2018  
Trade receivables, net of allowance for doubtful accounts   $ 2,469     $ 4,530  
Customer advances   $ 110     $ 141  

  

Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.

 

Transaction price and variable consideration

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration, revenue is recognized over time as it mainly is attributed to ongoing services provided. An immaterial amount which is related to the product is not recognized upon delivery since it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

F-21

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 8 – Discontinued operations

 

As described in Note 1C, the Company divested its interest in the SmartID division and its Medismart activity, and presented these activities as discontinued operations.

 

Set forth below are the results of the discontinued operations:

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2019     *2018     2019     *2018  
Revenues   $ -     $ 374     $ -     $ 1,139  
Expenses     (36 )     (332 )     (279 )     (924 )
Other income, net     -       -       -       13  
Net (loss) profit from discontinued operations     (36 )     42       (279 )     228  

 

* Reclassified to conform with the current period presentation, see Note 1C(2).

 

Note 9 – Fair Value of Financial Instruments

 

The Company’s financial instruments consist mainly of cash and cash equivalents, short-term investments bearing interest, accounts receivable, restricted deposits for employee benefits, accounts payable and short-term and long-term loans.

 

Fair value for the measurement of financial assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes a valuation hierarchy for disclosure of the inputs for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

F-22

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 9 – Fair Value of Financial Instruments (cont’d)

 

By distinguishing between inputs that are observable in the market place, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

The Company, in estimating fair value for financial instruments, determined that the carrying amounts of cash and cash equivalents, trade receivables, short-term bank credit and trade payables are equivalent to, or approximate their fair value due to the short-term maturity of these instruments.

 

The carrying amounts of variable interest rate long-term loans are equivalent or approximate to their fair value as they bear interest at approximate market rates.

 

As of September 30, 2019, the Company held approximately $1,905 of short-term bank deposits (as of December 31, 2018, $1,078). As of September 30, 2019 and December 31, 2018, short-term deposits in the amount of $105 and $278, respectively, have been pledged as security in respect of guarantees granted in respect of performance guarantees, loans and credit lines received from a bank and cannot be pledged to others or withdrawn without the consent of the bank.

 

Note 10 – Equity

 

A. Stock option plans

  

During the nine-month periods ended September 30, 2019 and September 30, 2018, 230,000 and 100,000 options were granted, respectively. The vesting period for the options is three years. The exercise prices for the options that were granted during the nine months ended September 30, 2019 and September 30, 2018, are $0.55 and $1.33, respectively. Those options expire up to five years after the date of grant. Any options which are forfeited or cancelled before expiration become available for future grants under the Company’s option plan. The fair value of each option granted to employees during the nine months ended September 30, 2019 and September 30, 2018 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:

 

    Nine months ended
September 30,
 
    2019     2018  
Expected dividend yield     0 %     0 %
Expected volatility     79 %     80 %
Risk-free interest rate     2.07 %     1.92 %
Expected life - in years     2.44       2.33  

 

F-23

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 10 – Equity (cont’d)

 

A. Stock option plans (cont’d)

 

1. Dividend yield of zero percent for all periods.
2. Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on Nasdaq.
3. Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
4. Estimated expected lives are based on historical grants data.

 

The Company’s options activity (including options to non-employees) during the nine months ended September 30, 2019 and options outstanding and options exercisable as of December 31, 2018 and September 30, 2019, are summarized in the following table:

 

    Number of options outstanding     Weighted average exercise price per share  
Outstanding – December 31, 2018     1,461,000     $ 1.24  
                 
Options granted     230,000       0.55  
Options expired or forfeited     (468,669 )     1.68  
Outstanding – September 30, 2019     1,222,331       0.94  
                 
Exercisable as of:                
December 31, 2018     855,642     $ 1.32  
September 30, 2019     760,978     $ 0.96  

 

The weighted average fair value of options granted during the nine months ended September 30, 2019 and during the nine months ended September 30, 2018 is $0.2 and $0.65, respectively, per option. The aggregate intrinsic value of outstanding options as of September 30, 2019 and December 31, 2018 is approximately zero and $6, respectively. The aggregate intrinsic value of exercisable options as of September 30, 2019 and December 31, 2018 is approximately zero and $4, respectively.

 

F-24

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 10 – Equity (cont’d)

 

A. Stock option plans (cont’d)

 

The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of September 30, 2019:

 

    Options outstanding     Options exercisable  
    Number     Weighted           Number     Weighted        
    Outstanding     average     Weighted     Outstanding     average     Weighted  
    as of     remaining     Average     As of     remaining     Average  
Range of   September 30,     contractual     Exercise     September 30,     contractual     Exercise  
exercise price ($)   2019     life (years)     Price     2019     life (years)     Price  
0.44- 0.90     643,000       1.78     $ 0.69       420,000       0.31     $ 0.74  
1.07-1.68     579,331       2.2     $ 1.21       340,978       1.75     $ 1.24  
      1,222,331       1.98               760,978       0.96          

  

As of September 30, 2019, there was approximately $114 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of approximately 1.05 years.

 

During the three months ended September 30, 2019 and September 30, 2018, the Company recorded stock-based compensation expenses in the amount of $6 and $65, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”

 

During the nine months ended September 30, 2019 and September 30, 2018, the Company recorded stock-based compensation expenses in the amount of $96 and $180, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”

 

B. Warrants

 

1. During the nine months ended September 30, 2019, no warrants expired or were exercised into ordinary shares.
2. As of September 30, 2019, there are remaining 40,000 outstanding warrants issued to one of the Company’s consultants during 2016 with a per share exercise price of $0.95. The warrants expire during November 2019.

 

C. Stock options and warrants in the amounts of 1,262,331 and 1,398,666 outstanding as of the nine months ended September 30, 2019 and 2018, respectively, have been excluded from the calculation of the diluted net loss per ordinary share because all such securities have an anti-dilutive effect for all periods presented.

 

D. Shares to non-employees

 

During the nine months ended September 30, 2019 and September 30, 2018, the Company issued 30,000 and 80,000 ordinary shares, respectively, to its consultants. The expenses that are recognized due to those grants are immaterial and are presented within ‘stock-based compensation’ in the statement of changes in equity for the nine months ended September 30, 2019 and September 30, 2018.

 

F-25

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 11 – Operating segments

 

For the purposes of allocating resources and assessing performance in order to improve profitability, the Company’s chief operating decision maker (“CODM”) examines two segments which are the Company’s strategic business units: (1) Retail and Mass Transit Ticketing; and (2) Petroleum.

 

Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.

 

    Three months ended September 30, 2019  
    Petroleum     Retail and
Mass Transit
Ticketing
    Consolidated  
                   
Revenues   $ 929     $ 2,936     $ 3,865  
Reportable segment gross profit *     310       1,585       1,895  
Reconciliation of reportable segment gross profit to gross profit for the period                        
Depreciation                     (190 )
Stock-based compensation                     (1 )
Gross profit for the period in the consolidated financial statement                   $ 1,704  

 

    Three months ended September 30, 2018 **  
    Petroleum     Retail and
Mass Transit
Ticketing
    Consolidated  
                   
Revenues   $ 1,317     $ 4,782     $ 6,099  
Reportable segment gross profit *     682       2,750       3,432  
Reconciliation of reportable segment gross profit to gross profit for the period                        
Depreciation                     (202 )
Stock-based compensation                     (1 )
Gross profit for the period in the consolidated financial statement                   $ 3,229  

 

F-26

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

 

US dollars in thousands (except per share amounts)

 

Note 11 – Operating segments (cont’d)

 

    Nine months ended September 30, 2019  
    Petroleum     Retail and
Mass Transit
Ticketing
    Consolidated  
                   
Revenues   $ 2,388     $ 8,606     $ 10,994  
Reportable segment gross profit *     1,106       5,206       6,312  
Reconciliation of reportable segment gross profit to profit for the period                        
Depreciation                     (588 )
Stock-based compensation                     (3 )
Gross profit for the period in the consolidated financial statement                   $ 5,721  

 

    Nine months ended September 30, 2018 **  
    Petroleum     Retail and
Mass Transit
Ticketing
    Consolidated  
                   
Revenues   $ 3,942     $ 13,408     $ 17,350  
Reportable segment gross profit *     2,000       7,628       9,628  
Reconciliation of reportable segment gross profit to profit for the period                        
Depreciation                     (626 )
Stock-based compensation                     (3 )
Gross profit for the period in the consolidated financial statement                   $ 8,999  

  

* Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.

 

** Reclassified to conform with the current period presentation, see Note 1C(2).

 

F-27

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward - Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q, or Quarterly Report, that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “intends,” “plans”, “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any actual future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements may appear in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report and include, among other statements, statements regarding the following:

 

the expected development and potential benefits from our existing or future products or our intellectual property, or IP;

 

changes in generation of revenues from licensing, transaction fees and/or other arrangements;

 

future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers;

 

our intention to generate additional recurring revenues, licensing and transaction fees;

 

future costs and expenses and adequacy of capital resources;

 

our expectations regarding our short-term and long-term capital requirements;

 

our intention to continue to invest in research and development;

 

changes to our leadership team;

 

our outlook for the coming months; and

 

information with respect to any other plans and strategies for our business.

 

The factors discussed herein, including those risk factors expressed from time to time in our press releases or filings with the Securities and Exchange Commission, or the SEC, could cause actual results and developments to be materially different from those expressed in or implied by such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak and are made only as of the date of this filing.

 

Our business and operations are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Quarterly Report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described among others under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.

 

2

 

 

As used in this Quarterly Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track Innovations Ltd. and our subsidiaries, unless otherwise indicated or as otherwise required by the context.

 

All figures in this Quarterly Report are stated in United States dollars, unless otherwise specified herein.

 

Overview

 

We are a fintech pioneer and leading developer of cutting-edge secure cashless payment solutions providing global enterprises with innovative technology for almost three decades. We operate in two main segments: (1) Retail and Mass Transit Ticketing; and (2) Petroleum. As a result of the closing of the MediSmart Transaction in December 2018, we no longer report our “Other” segment.

 

Our field-proven suite of cashless payment solutions is based on an extensive IP portfolio including registered patents and patent applications worldwide. Since our incorporation in 1990, we have built reputation internationally for reliability and innovation, deploying a large number of solutions for the unattended retail, mass transit, banking, medical and petroleum industries.

 

We operate a global network of regional offices and distributors to support various solutions deployed across the globe.

 

This discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained in “Item 1.  Financial Statements” of this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC.

 

Results of Operations

 

Discontinued operations. In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division. The results from such operations and the cash flows for the reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.

 

In December 2018, we completed the sale of our medical smart card’s operation, or Medismart, (formerly part of the Company’s “Other segment”) to Smart Applications International Limited, or Smart, for a total price of $2.75 million. We have determined that the sale of the Medismart business qualifies as a discontinued operation. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.

 

All the data in this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those discontinued operations.

 

3

 

 

Three months ended September 30, 2019, compared to the three months ended September 30, 2018

 

Sources of Revenue

 

We have historically derived a substantial majority of our revenues from the sale of our products, including both complete systems and original equipment manufacturer components and also less significantly, from engineering services, customer services and technical support. In addition, we generate revenues from licensing and transaction fees. During the three months ended September 30, 2019 and September 30, 2018, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):

 

   

Three months ended

September 30,

 
    2019     2018  
Sales   $ 2,631     $ 4,760  
Licensing and transaction fees   $ 1,234     $ 1,339  
 Total revenues   $ 3,865     $ 6,099  

 

Sales. Sales decreased by $2.1 million, or 45%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The decrease is mainly attributed to a decrease in Retail and Mass Transit Ticketing segment sales of our products in Japan and sales of readers in Europe and to a decrease in Petroleum products in the United States, partially offset by an increase in sales of readers in the United States.

 

Licensing and transaction fees. Licensing and transaction fees include single and periodic payments for distribution rights for our products as well as licensing our IP rights to third parties. Transaction fees are paid by customers based on the volume of transactions processed by systems that contain our products. Our licensing and transaction fees in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, decreased by $105,000, or 8%. The decrease is mainly attributed to a decrease in our licensing and transaction fees in Europe.

 

We have historically derived revenues from different geographical areas. The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of quarterly revenues in different geographical areas, in the three months ended September 30, 2019 and September 30, 2018:

 

Three months ended September 30,   Africa     Europe     APAC     Americas  
2019   $ 492       13 %   $ 1,714       44 %   $ 214       6 %   $ 1,445       37 %
2018   $ 618       10 %   $ 2,517       41 %   $ 1,548       26 %   $ 1,416       23 %

 

Our revenues from sales in Africa decreased by $126,000, or 20%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, mainly due to a decrease in sales of Petroleum products.

 

Our revenues from sales in Europe decreased by $803,000, or 32%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, mainly due to a decrease of sales of readers and to a lesser extent to a decrease of licensing and transaction fees.

 

Our revenues from sales in Asia-Pacific region, or APAC, decreased by $1.3 million, or 86%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, mainly due to a decrease in sales of our Uno Plus and GoBox products in Japan.

 

Our revenues from sales in Americas in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, remained consistent mainly due to an increase in sales of readers in our Retail and Mass Transit Ticketing segment offset by a decrease in Petroleum products.

 

Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.

 

4

 

 

The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the three months ended September 30, 2019 and September 30, 2018:

 

Three months ended September 30,   Retail and Mass
Transit Ticketing
    Petroleum  
2019   $ 2,935       76 %   $ 930       24 %
2018   $ 4,781       78 %   $ 1,318       22 %

 

Our revenues from Retail and Mass Transit Ticketing in the three months ended September 30, 2019, decreased by $1.8 million, or 39%, compared to the three months ended September 30, 2018, mainly attributed to a decrease in sales in Japan and a decrease in sales of readers in Europe, partially offset by an increase in sales of readers in the United States.

 

Our revenues in the three months ended September 30, 2019, from Petroleum decreased by $389,000, or 30%, compared to the three months ended September 30, 2018, mainly due to a decrease in sales of Petroleum products in the United States.

 

Cost of Revenues and Gross Margin

 

Our cost of revenues, presented by gross profit and gross margin percentage, in the three months ended September 30, 2019 and September 30, 2018, were as follows (dollar amounts in thousands):

 

Cost of revenues   Three months ended September 30,  
    2019     2018  
             
Cost of sales   $ 2,161     $ 2,870  
Gross profit   $ 1,704     $ 3,229  
Gross margin percentage     44 %     53 %

 

Cost of sales.  Cost of sales consists primarily of materials, as well as salaries, fees to subcontractors and related costs of our technical staff that assemble our products. The decrease of $709,000, or 25%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, resulted primarily from a decrease in sales and as a result of inventory adjustments.

 

Gross margin. The decrease in gross margin in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is mainly attributed to inventory adjustments and to a change in our revenue mix.

 

5

 

 

Operating expenses

 

Our operating expenses in the three months ended September 30, 2019 and September 30, 2018, were as follows (in thousands):

 

Operating expenses   Three months ended September 30,  
    2019     2018  
Research and development   $ 840     $ 765  
Selling and marketing   $ 1,193     $ 1,591  
General and administrative   $ 1,070     $ 1,099  
Other (gain) expenses, net   $ (335 )   $ -  
Total operating expenses   $ 2,768     $ 3,455  

 

Research and development.  Our research and development expenses consist primarily of the salaries and related expenses of our research and development staff, as well as subcontracting expenses. The increase of $75,000, or 10%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is primarily attributed to an increase in subcontractor expenses.

 

Selling and marketing.  Our selling and marketing expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing subsidiaries and offices in the United States, South Africa and Europe, as well as expenses related to advertising, professional expenses and participation in exhibitions and tradeshows. The decrease of $399,000, or 25%, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is primarily attributed to a decrease in marketing and advertising expenses and to a lesser extent to a decrease in employment expenses.

 

General and administrative.  Our general and administrative expenses consist primarily of salaries and related expenses of our executive management and financial and administrative staff. These expenses also include costs of our professional advisors (such as legal and accounting), office expenses and insurance. Our general and administrative expenses in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is primarily attributed to a capital gain from the sale of a building by our South African subsidiary.

 

Other (gain) expenses, net. Our other (gain) expenses, net, are primarily attributed to a capital gain from the sale of a building by our South African subsidiary.

 

Financing expenses, net

 

Our financing expenses, net, in the three months ended September 30, 2019 and September 30, 2018, were as follows (in thousands):

 

    Three months ended September 30,  
    2019     2018  
Financing expenses, net   $ (93 )   $ (2 )

 

Financing expenses consist primarily of interest payable on bank loans, bank commissions and foreign exchange losses. Financing income consists primarily of foreign exchange gains and interest earned on investments in short-term deposits. The decrease in financing expenses, net in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, of $91,000, is mainly attributed to exchange rate differentials.

 

6

 

 

Net loss from continuing operations

 

Our net loss from continuing operations in the three months ended September 30, 2019 and September 30, 2018, was as follows (in thousands):

 

   

Three months ended

September 30,

 
    2019     2018  
Net loss from continuing operations   $ (1,174 )   $ (226 )

 

The decrease in the net loss from continuing operations of $948,000, in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is mainly due to a decrease in our sales, partially offset by a decrease in our operating expenses, as described above.

 

Net (loss) income from discontinued operations

 

Our net (loss) income from discontinued operations in the three months ended September 30, 2019 and September 30, 2018, was as follows (in thousands):

 

   

Three months ended

September 30,

 
    2019     2018  
Net (loss) income from discontinued operations   $ (36 )   $ 42  

 

The results from these operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The change of $78,000 in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is mainly due to income related to the MediSmart activity in 2018.

 

Net loss

 

Our net loss in the three months ended September 30, 2019 and September 30, 2018, was as follows (in thousands):

 

   

Three months ended

September 30,

 
    2019     2018  
Net (loss) income   $ (1,210 )   $ (184 )

 

The increase in net loss of $1.0 million in the three months ended September 30, 2019, compared to the three months ended September 30, 2018, is primarily due to a decrease in our sales, partially offset by a decrease in our operating expenses, as described above.

 

7

 

 

Nine months ended September 30, 2019, compared to the nine months ended September 30, 2018 

 

Sources of Revenue

 

During the nine months ended September 30, 2019 and September 30, 2018, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):

 

   

Nine months ended

September 30,

 
    2019     2018  
Sales   $ 7,286     $ 13,353  
Licensing and transaction fees   $ 3,708     $ 3,997  
 Total revenues   $ 10,994     $ 17,350  

 

Sales. Sales decreased by $6.0 million, or 45%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The decrease is mainly attributed to a decrease in sales of readers and Petroleum products in the United States and to sales in Japan.

 

Licensing and transaction fees. Our licensing and transaction fees in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, decreased by $289,000, or 7%. The decrease is mainly attributed to a decrease in our licensing and transaction fees in Europe.

 

We have historically derived revenues from different geographical areas.  The following table sets forth our revenues (in thousands) and as a percentage of revenues in different geographical areas, in the nine months ended September 30, 2019 and September 30, 2018:

 

Nine months ended September 30,   Africa     Europe     APAC     Americas  
2019   $ 1,527       14 %   $ 5,633       51 %   $ 880       8 %   $ 2,954       27 %
2018   $ 1,859       11 %   $ 6,313       36 %   $ 2,794       16 %   $ 6,384       37 %

 

Our revenues from sales in Africa decreased by $332,000, or 18%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, mainly due to a decrease in sales of Petroleum products.

 

Our revenues from sales in Europe decreased by $680,000, or 11%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, mainly due to a decrease in our licensing and transaction fees and to a lesser extent to a decrease in sales of readers.

 

Our revenues from sales in APAC decreased by $1.9 million, or 69%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, mainly due to a decrease in sales in the Japanese market.

 

Our revenues from sales in Americas decreased by $3.4 million, or 54%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, mainly due to a decrease in sales of readers to the U.S. market that we believe was derived from new tariffs that were presented by the U.S. administration on goods imported from China to the U.S. market and to a decrease in sales of Petroleum products in Americas. As a result of the above mentioned tariffs, we have relocated our production from China to the Philippines.

 

Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.

 

8

 

 

The following table sets forth our revenues (in thousands) and as a percentage of revenues by segments, during the nine months ended September 30, 2019 and September 30, 2018:

 

Nine months ended September 30,     Retail and Mass Transit Ticketing     Petroleum  
2019     $ 8,605       78 %   $ 2,389       22 %
2018     $ 13,407       77 %   $ 3,943       23 %

 

Our revenues from Retail and Mass Transit Ticketing in the nine months ended September 30, 2019, decreased by $4.8 million, or 36%, compared to the nine months ended September 30, 2018, mainly attributed to a decrease in sales of readers in the United States and a decrease in sales in Japan.

 

Our revenues in the nine months ended September 30, 2019, from Petroleum decreased by $1.6 million, or 39%, compared to the nine months ended September 30, 2018, mainly due to a decrease in Petroleum products in the United States.

 

Cost of Revenues and Gross Margin

 

Our cost of revenues, presented by gross profit and gross margin percentage, in the nine months ended September 30, 2019 and September 30, 2018, were as follows (in thousands):

 

Cost of revenues   Nine months ended September 30,  
    2019     2018  
             
Cost of sales   $ 5,273     $ 8,351  
Gross profit   $ 5,721     $ 8,999  
Gross margin percentage     52 %     52 %

 

Cost of sales. The decrease of $3.1 million, or 37%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, resulted primarily from a decrease in sales.

 

Gross margin. Our gross margin in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, remained consistent.

 

9

 

 

Operating expenses

 

Our operating expenses in the nine months ended September 30, 2019 and September 30, 2018, were as follows (in thousands):

 

Operating expenses   Nine months ended September 30,  
    2019     2018  
Research and development   $ 2,528     $ 2,391  
Selling and marketing   $ 3,798     $ 4,700  
General and administrative   $ 3,081     $ 3,001  
Other (gain) expenses, net   $ (335 )   $ 70  
Total operating expenses   $ 9,072     $ 10,162  

 

Research and development. The increase of $137,000, or 6%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is primarily attributed to an increase in subcontractor expenses, partially offset by a decrease in employment expenses.

 

Selling and marketing. The decrease of $902,000, or 19%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is primarily attributed to a decrease in employment expenses and to a lesser extent to a decrease in marketing and advertising expenses.

 

General and administrative. Our general and administrative expenses in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, remained consistent.

 

Other (gain) expenses, net. The change of $405,000 in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is mainly due to a capital gain from the sale of a building by our South African subsidiary.

 

Financing expenses, net

 

Our financing expenses, net, in the nine months ended September 30, 2019 and September 30, 2018, were as follows (in thousands):

 

    Nine months ended September 30,  
    2019     2018  
Financing expenses, net   $ (199 )   $ (129 )

 

The increase of financing expenses, net in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, of $70,000, or 54%, is mainly attributed to exchange rate differentials, partially offset by a decrease in interest expenses of our short-term and long-term bank loans.

 

10

 

 

Net loss from continuing operations

 

Our net loss from continuing operations in the nine months ended September 30, 2019 and September 30, 2018, was as follows (in thousands):

 

   

Nine months ended

September 30,

 
    2019     2018  
Net loss from continuing operations   $ (3,575 )   $ (1,025 )

 

The increase in net loss from continuing operations of $2.6 million, or 249%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is mainly due to a decrease in our sales, partially offset by a decrease in our operating expenses, as described above.

 

Net (loss) income from discontinued operations

 

Our net (loss) income from discontinued operations in the nine months ended September 30, 2019 and September 30, 2018, was as follows (in thousands):

 

   

Nine months ended

September 30,

 
    2019     2018  
Net (loss) income from discontinued operations   $ (279 )   $ 228  

         

The results from these operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The change in the discontinued operations results of $507,000 in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018 is mainly attributed to the MediSmart activity in 2018 and in a lesser amount expenses related to SmartID divestiture in 2019.

 

Net income

 

Our net income in the nine months ended September 30, 2019 and September 30, 2018, was as follows (in thousands):

 

    Nine months ended
September 30,
    2019     2018
Net (loss) income   $ (3,854)     $ (797)

 

The increase in net loss of $3.1 million, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is primarily due to a decrease in our sales and an increase in net loss from discontinued operations, partially offset by a decrease in our operating expenses, as described above.

 

11

 

 

Liquidity and Capital Resources

 

Our principal sources of liquidity since our inception have been sales of our products and services, sales of equity securities, borrowings from banks, cash from the exercise of options and warrants and proceeds from divestiture of parts of our businesses. We had cash, cash equivalents and short-term investments representing bank deposits of $5.3 million as of September 30, 2019 (of which an amount of $105,000 has been pledged as security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank), and $5.9 million as of December 31, 2018 (of which an amount of $278,000 had then been pledged as security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank).  We believe that we have sufficient capital resources to fund our operations in the next 12 months. We are looking for additional resources of capital, including investment in our equity securities and loans, to finance our operations.  As of September 30, 2019, our long-term bank loans are denominated in South African Rand ($26,000, with maturity dates ranging from 2019 through 2023).

 

In March 2019, OTI Petrosmart (Pty), Ltd., our South African subsidiary, or Petrosmart, entered into an agreement pursuant to which Petrosmart agreed to sell its head office in Cape Town, South Africa, to a third party for a consideration of Rand 15,500,000 (approximately $1.1 million), and Petrosmart agreed to lease back this building for its current operations. The sale was completed, and the operating lease commenced during the third quarter of 2019.

 

Our composition of long-term loans as of September 30, 2019, was as follows (in thousands):

 

    September 30,
2019
 
Long-term loans   $ 34  
Less - current maturities     8  
    $ 26  

 

Our and certain of our subsidiaries’ manufacturing facilities and certain equipment have been pledged as security in respect of a loan received from a bank. As of September 30, 2019, our short-term deposits in the amount of $105,000 have been pledged as security in respect of guarantees granted to third parties, loans and credit lines received from a bank. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.

 

As of September 30, 2019, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in the sum of $387,000. The expiration dates of the guarantees range from April 2020 to September 2021.

 

Operating activities related to continuing operations 

 

For the nine months ended September 30, 2019, net cash used in continuing operating activities was $1.9 million, primarily due to a $879,000 increase in inventory, a $585,000 decrease in other current liabilities, a $328,000 gain on sale of property and equipment, a $48,000 decrease in accrued interest and a $25,000 decrease in deferred tax liability, partially offset by a $1.6 million decrease in trade receivables, a $951,000 of depreciation expenses, a $506,000 increase in trade payables, a $395,000 decrease in other receivables and prepaid expenses, a $96,000 expense due to stock-based compensation issued to employees and a $66,000 change in accrued severance pay, net.

 

12

 

 

For the nine months ended September 30, 2018, net cash provided by continuing operating activities was $56,000, primarily due to a $1.4 million decrease in trade receivables, $978,000 of depreciation expenses and a $180,000 expense due to stock-based compensation issued to employees, partially offset by a $381,000 increase in inventory, a $360,000 decrease in deferred tax liability, a $263,000 decrease in trade payables, a $255,000 increase in other receivables and prepaid expenses, a $151,000 decrease in other current liabilities, a $25,000 gain on sale of property and equipment and a $19,000 change in accrued severance pay, net.

 

Operating activities related to discontinued operations

 

For the nine months ended September 30, 2019, net cash used in discontinued operating activities was $1.4 million, mainly related to the dispute regarding Merwell Inc. related to the SmartID division.

 

For the nine months ended September 30, 2018, net cash provided by discontinued operating activities was $836,000, related to the SmartID division and previous parking business.

 

Investing and financing activities related to continuing operations

 

For the nine months ended September 30, 2019, net cash used in continuing investing activities was $455,000, mainly due to $978,000 in proceeds of short-term investments, $433,000 of purchases of property and equipment and $156,000 investment in capitalized product costs, partially offset by $1.1 million in proceeds from the sale of property and equipment and $10,000 in proceeds from restricted deposits for employee benefits.

 

For the nine months ended September 30, 2018, net cash provided by continuing investing activities was $696,000, mainly due to $1.2 million of short-term investments, $52,000 in proceeds from the sale of property and equipment and $8,000 in proceeds from restricted deposits for employee benefits, partially offset by $467,000 purchases of property and equipment and $92,000 investment in capitalized product costs.

 

For the nine months ended September 30, 2019, net cash provided by continuing financing activities was $2.4 million, mainly due to a $2.6 million increase in short-term bank credit, partially offset by a repayment of $261,000 of long-term bank loans.

 

For the nine months ended September 30, 2018, net cash used in continuing financing activities was $4.4 million, mainly due to a $3.4 million decrease in short-term bank credit and a repayment of $979,000 of long-term bank loans, partially offset by proceeds of $34,000 from the exercise of options.

 

In addition, on May 24, 2019, ASEC S.A. (Spolka Akcyjna), or, the Subsidiary, a wholly-owned Polish subsidiary of the Company, entered into a loan agreement, or the Agreement, with PKO Bank Polski, a Polish bank, or the Lender. The Agreement provides that the Lender will grant an overdraft facility to the Subsidiary in the amount of $2,000,000, or the Loan Commitment. On May 24, 2019, or, the Lender loaned to the Subsidiary the full amount of the Loan Commitment, secured by certain assets of the Subsidiary, or the Secured Loan. The Secured Loan matures on May 23, 2020. The Secured Loan will be payable in full on maturity (with option of early repayment from the Subsidiary side) and the interest will be paid on a monthly basis. The Secured Loan bears interest at an annual interest rate based on 1-month LIBOR plus a margin of 1.8%, or currently approximately 3.8% in total. The Agreement includes customary events of default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the Agreement, etc. If an event of default occurs, the Lender may reduce the amount of the Secured Loan, demand an additional security or terminate the Agreement.

 

Investing and financing activities related to discontinued operations

 

We had no cash flows provided by or used in discontinued investing or financing activities in the nine months ended September 30, 2019 and September 30, 2018.

 

13

 

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures - Our management, including our Interim Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was made known to our management, including our CEO and CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of September 30, 2019. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective as of such date.

 

Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

14

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In December 2013, we completed the sale of certain assets, subsidiaries and intellectual property, or IP, relating to our Smart ID division, for a total purchase price of $10,000,000 in cash and an additional $12,500,000 subject to performance-based milestones. On April 20, 2016, the purchaser of the Smart ID division, SuperCom Ltd., or SuperCom, and we entered into a settlement agreement resolving certain litigation between SuperCom and us pursuant to which SuperCom paid us $2,050,000 and will agree to pay us up to $1,500,000 with and subject to a certain earn-out mechanism. In November 2017, we commenced an arbitration procedure with SuperCom, in which we claim that additional earn-out payments have not been paid to us. SuperCom has also raised claims against us during the arbitration procedure. An arbitration decision was issued on December 24, 2018 in our favor and denied SuperCom’s claims. The Arbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that we are entitled to receive, and to pay us accordingly, or otherwise pay us the maximum earn-out amount, which equals $1,500,000, minus the earn-out amounts that were already paid by SuperCom to us. As of the date hereof, the said arbitration verdict has been validated as a court verdict, and the Company is currently taking actions to enforce it.

 

In June 2013, prior to our divestiture of our SmartID division, Merwell Inc., or Merwell, filed a claim against us before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division were later assigned to and assumed by SuperCom Ltd., or SuperCom, in its purchase of the division. SuperCom undertook to indemnify us and hold us harmless against any liabilities we may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell $854,912 for outstanding commissions and ordering the Company to provide further financial details that might result in additional payments to Merwell. The arbitration decision had been appealed by SuperCom (on behalf of the Company) but the appeal was denied. In order to collect the award, Merwell filed a motion against the Company and on January 7, 2019 the Nazareth District Court issued a judgment requiring the Company to pay Merwell an amount of NIS 5,078,581 (approximately $1,370,000). On January 8, 2019, we paid Merwell such amount. As mentioned above, based on the agreement with SuperCom (which was granted an effect of a court judgment), we deem SuperCom to be liable for all the costs and liabilities arising out of this claim. On February 17, 2019, we initiated an arbitration process, or the Arbitration, to collect from SuperCom the amount paid to Merwell which SuperCom failed to pay, and to assure that SuperCom will pay any additional amounts, if required in the future. On March 26, 2019, SuperCom filed a petition to the Tel-Aviv District Court, asking to order that the dispute will be conducted in Court and not in arbitration. On October 29, 2019, a hearing was conducted in court regarding SuperCom’s petition, and at the end of the hearing, following the court’s recommendation, SuperCom agreed to withdraw its petition. As a result, the court gave a verdict ordering that the Arbitration will continue. On the same day, the Company approached the arbitrator, asking to renew the Arbitration, and on October 30, 2019 the arbitrator scheduled a preliminary hearing.

 

On June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration, with respect to the additional financial details that Merwell claims that the Company was ordered to provide according to the arbitration verdict from February 21, 2016, and additional payments that Merwell claims that the Company is obligated to pay Merwell. The said financial details refer to the quantity of smart driving licenses that Merwell claims were issued in the later period of a project in Tanzania in which Merwell claims to have provided services to the Company. Merwell claims that despite the Company’s failure to provide the details, Merwell obtained the details independently from other sources, and they indicate that the Company is obligated to pay Merwell an additional amount of $1,618,792. The Company rejects the details that were presented by Merwell and their validity, and also raised preliminary claims that this matter cannot be determined in arbitration, but only in court, since the relevant data is held by SuperCom, who is not a party to the arbitration agreement with Merwell, but issued the licenses in the relevant period and therefore is a necessary party to the dispute. The Company filed an application to the arbitrator, and on August 8, 2019, the arbitrator determined that the Company’s procedural claims should be heard and determined in court. Following that decision, on September 8, 2019, the Company filed a petition to the Tel-Aviv District Court, asking it to order that Merwell’s claims in the complementary procedure will be heard in court and not in arbitration. On October 22, 2019, Merwell submitted its response to the court. As of the date of this report, a hearing in the petition has not yet scheduled.

 

15

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In February 2019, the Company issued to MZHCI LLC 30,000 Ordinary Shares of the Company for fully performed services provided to the Company. We issued these shares pursuant to an exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 5. Other Information.

 

As reported on the Company’s Current Report on Form 8-K filed on September 30, 2019, the proposal to amend the Amended and Restated Compensation Policy of the Company, or the Compensation Policy, was not approved by the general meeting of shareholders of the Company, or the General Meeting, as the proposal did not receive the requisite majority required under the Israeli Companies Law, or the Companies Law. Notwithstanding the above, under the Companies Law, the board of directors of a company has the right to overrule the resolution of the general meeting of the company’s shareholders to not approve proposed changes to the company’s compensation policy, if certain conditions are being met. Accordingly, and pursuant to the Companies Law, on November 5, 2019, the Company’s board of directors, or the Board, approved the same proposed amendments to the Compensation Policy, as were included in the Company’s Definitive Proxy Statement filed on August 23, 2019. Prior to such approval, the Compensation Committee of the Company and thereafter the Board, discussed the suggested amendments to the Compensation Policy, and determined that notwithstanding the outcome of the General Meeting, the approval of the amendments to the Compensation Policy is in the Company’s best interest.

 

Item 6. Exhibits.

 

3.1 Amended and Restated Articles of Incorporation (incorporated by reference to the Company’s Report on Form 6-K filed with the SEC on October 31, 2013).
3.2 Memorandum of Association, dated February 14, 1990 (incorporated by reference to the Company’s Registration Statement on Form F-1, filed with the SEC on June 14, 2002).
10.1* Amendment to Personal Employment Contract, dated September 30, 2019, by and between the Company and Mr. Assaf Cohen.
10.2 Employment Agreement, dated November 5, 2019, by and between the Company and Mr. Yehuda Holtzman (incorporated by reference to the Company’s Report on Form 8-K filed with the SEC on November 6, 2019).
10.3 Amended and Restated Executive Compensation Policy (incorporated by reference to the Company’s proxy statement on Schedule 14A filed with the SEC on August 23, 2019).
31.1* Rule 13a-14(a) Certification of Interim Chief Executive Officer and Chief Financial Officer.
32.1** Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101 * The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 formatted in XBRL (eXtensible Business Reporting Language): (i) the Interim Condensed Consolidated Balance Sheets, (ii) the Interim Condensed Consolidated Statements of Operations, (iii) the Interim Condensed Consolidated Statements of Comprehensive  (Loss) Income, (iv) the Interim Condensed Statements of Changes in Equity, (v) the Interim Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Interim Condensed Consolidated Financial Statements, tagged as blocks of text and in detail.

 

* Filed herewith.

 

** Furnished herewith.

 

16

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ON TRACK INNOVATIONS LTD.
 
By: /s/ Assaf Cohen  
  Assaf Cohen,
Interim Chief Executive Officer and
Chief Financial Officer
  (Principal Executive Officer and
Principal Financial and Accounting Officer)
  Dated: November 13, 2019

 

 

17

 

 

Exhibit 10.1

 

Amendment to Personal Employment Contract

 

This Amendment to Personal Employment Contract (the “Amendment”) is made and entered into as of September 30, 2019 (the “Effective Date”), by and between On Track Innovation Ltd. (the “Company”), and Mr. Assaf Cohen (the “Employee”, and together with the Company: the “Parties”).

 

WHEREAS, the Employee is employed by the Company in accordance with the terms and conditions set under that certain employment agreement dated February 27, 2018 (the “Employment Agreement”) and together with this Amendment the “Agreement”); and,

 

WHEREAS, the Parties desire to amend certain provisions of the Employment Agreement, as further specified herein;

 

NOW, THEREFORE, in consideration of the mutual premises, covenants and other agreements contained herein, the Parties agree as follows:

 

1. Amendment.

 

1.1. Position. Commencing on August 1, 2019, the position of Employee shall be Interim CEO (the “Additional Duty”), while also continuing to serve as Company’s CFO. The Employee shall serve in the Additional Duty capacity until a permanent CEO is appointed.

 

1.2. Consideration. Commencing on the salary payable for August 2019 (due in September 2019), the gross monthly salary payable to the Employee for his services as the Company’s CFO shall be increased to NIS 45,000 (the “Revised Salary”).

 

1.3. Bonus. Subject to receipt of all requisite corporate approvals, which may include the approval of the general meeting of the shareholders of the Company, in consideration for Employee’s consent to perform the Additional Duty, Employee shall be entitled to a one-time bonus in a gross amount of NIS 100,000 which shall not be taken into account for the calculation of any social and/or any other fringe benefits.

 

1.4. Prior Notice. As of August 1, 2019, the prior notice period in connection with the Employee’s services as the Company’s CFO shall be mutually set at 6 months.

 

1.5. Stock Options. Effective August 13, 2019, with respect to Employee’s services as the Company’s CFO, Employee shall be granted with options to purchase up to 100,000 Ordinary Shares of the Company (the “Options”). The Options shall vest for a period of three (3) years, commencing on August 13, 2019, where 1/3 of the Options shall vest at the end of each year following the said vesting commencement date. The grant of Options and their terms shall be further subject to the Company’s Amended and Restated 2001 Stock Option Plan and Employee shall execute all requisite instruments required by the Company in this respect. The exercise price shall be $0.38.

 

1.6. Cellular Phone. Company shall gross up the value of the benefit or any other cost related to the cellular phone of Employee in the amount of the tax applicable to Employee in respect of the said benefit.

 

2. General.

 

2.1. All other terms of the Employment Agreement, to the extent not contradicting the provisions of this Amendment, shall continue to apply.

 

2.2. Any Capitalized Term not defined herein, shall have the meaning ascribed to it under the Employment Agreement.

 

 

 

 

IN WITNESS WHEREOF the Parties have signed this Amendment as of the date first set forth above.

 

/s/ James Scott Medford

  /s/ Assaf Cohen
On Track Innovation Ltd.   Assaf Cohen
By: James Scott Medford    
Title: Chairman of the Board of Directors    

 

 

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Assaf Cohen, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of On Track Innovations Ltd.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) of the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 13, 2019 /s/ Assaf Cohen
  Assaf Cohen,
  Interim Chief Executive Officer and
  Chief Financial Officer
  (Principal Executive Officer and
  Principal Financial Officer)

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

 

In connection with the Quarterly Report of On Track Innovations Ltd. (the “Company”) on Form 10-Q for the period ended September 30, 2019 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Assaf Cohen, Interim Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 13, 2019 By: /s/ Assaf Cohen
    Assaf Cohen
Interim Chief Executive Officer and
Chief Financial Officer