Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 1 - Organization and Basis of Presentation

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 quoted for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 31, 2019).

As of June 30, 2021, the Company operates in two operating segments: (a) Retail, and (b) Petroleum (see Note 11). The Company completed the sale of its Mass Transit Ticketing operation in April 2021 (see Note 1C(2)). The Company has determined that the Mass Transit Ticketing 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. In addition, the sale of the Mass Transit Ticketing business qualified as held for sale as of December 31, 2020.

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, 2020.

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 six-month period and the three-month period ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

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 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.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 1 - Organization and Basis of Presentation (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 claims against the Company during the arbitration for material damages. 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 approximately $1,300 that reflects the maximum earn-out amount that has not yet been paid to the Company by SuperCom. The arbitration verdict was approved as a court’s verdict in June 2019, but SuperCom failed to disclose the financial information in the way it should have done according to the arbitration decision. Therefore, in December 2019 the Company submitted a complementary claim to the arbitrator, asking for a final award that includes a final payment by SuperCom (as opposed to merely disclosing information). On January 21, 2021, after conclusion of the evidence phase in the arbitration, and after the Company already filed its summaries, SuperCom submitted new documents claiming that these include the missing financial information. Following the submission of these documents, on February 9, 2021, the Company submitted an application claiming that implementing the contractual sanction mechanism on the amounts presented in these documents testifies to the Company’s entitlement to the maximum earn-out amount, and, therefore, the arbitrator is requested to order that the parties will complete their summaries and then a verdict will be given. On March 8, 2021, the arbitrator accepted the Company’s application and on April 11, 2021, the Company submitted complementary summaries. Following an arbitration process between the Company and SuperCom, on August 10, 2021, the parties entered into a settlement agreement that concluded the legal proceedings with SuperCom. For further details see Notes 6A(1) and 6A(2).

On Track Innovations Ltd.

and Subsidiaries

US dollars, NIS and Euro in thousands, except share and per share data

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

The sale of ASEC was completed on April 21, 2021. The Company has determined that the Mass Transit Ticketing 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. In addition, assets and liabilities of the Polish subsidiary and assets and liabilities related to the Mass Transit Ticketing operation that have not yet been actually sold as of December 31, 2020, are presented as assets and liabilities held for sale in the balance sheets as of December 31, 2020.

The consideration for ASEC after reduction of some working capital adjustments, as agreed in April 2021, is approximately $2,700, out of which: (i) approximately $2,100 was transferred from the Buyer to ASEC at the end of March 2021 in order to repay Polish bank loans, out of which approximately $1,700 was repaid as of March 31, 2021 and a loan of approximately $400 was repaid at the beginning of April 2021 and (ii) $600 was paid by the Buyer to the Company in April 2021.

The Sale Agreement contains customary representations and warranties, as well as covenants, including an undertaking the Company provided not to compete with the business of ASEC for a period of five years after the closing and an undertaking to indemnify ASEC and the Buyer for certain damages. The Company’s liability is limited to the purchase price actually paid by the Buyer.

The Company has had recurring losses and cash outflows from operating activities. It has an accumulated deficit as of June 30, 2021 of $228,848. As of June 30, 2021 the Company also has a payable balance on its short-term bank loans, that is due within the next 12 months, of $795 and a convertible short-term loan from shareholders, including accrued interest, of $1,661 (out of which, only amounts of $77 is presented as a liability within ‘convertible short-term loan from a controlling shareholder’), that, if not converted, would mature in December 2021 (see also Note 5).

Since inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities (regarding the issuance of shares during the last two years, see Note 10A), borrowings from banks, government and shareholders, including convertible loans, proceeds from the exercise of options and warrants as well as proceeds from the divestiture of parts of the Company’s businesses. The Company had cash, cash equivalents and short-term investments representing bank deposits of $2,564 (of which an amount of $105 has been pledged as security for certain items) as of June 30, 2021. 

On Track Innovations Ltd.

and Subsidiaries

US dollars, NIS and Euro in thousands, except share and per share data

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

The recent situation in Poland resulting from the coronavirus (“COVID-19”) pandemic, led to an almost complete stop to the Company’s Mass Transit Ticketing sales business, which negatively impacted the Company’s cash flow. The revenues from this operation, that were relatively stable during the year preceding the COVID-19 outbreak, decreased by $295 in the first quarter of 2021 compared to the first quarter of 2020, mainly due to lockdowns and other restrictions and consequences of the COVID-19 as started in March 2020. On April 21, 2021, the Company completed the sale of ASEC, including its Mass Transit Ticketing activity, as mentioned in Note 1C(2). The results, including the revenues, and the cash flows of the Mass Transit Ticketing 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.

The Company’s management has been working on updating the Company’s strategy for the coming years in order to realize its potential, resume its growth, and ultimately create shareholder value. The Company raised additional funds and increased its cash, cash equivalents and short-term investments on May 19, 2021, as mentioned in Note 10A(2). Additionally, a portion of additional revenue the Company was hoping to recognize in the second quarter has become backlogged due to a shortage in components, as further described below, and will be delivered later in the year. Therefore, the Company believes that it has sufficient capital resources to fund its operations for at least the next 12 months. In addition, the Company engaged an investment bank to explore strategic options and is investing resources in this process.

In connection with the outbreak of COVID-19, the Company has taken steps to protect its workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include working from home where possible, minimizing face-to-face meetings, utilizing video conference as much as possible, social distancing at facilities and elimination of most international travel. The Company continues to comply with all local health directives.

The Company has continued to see an interest from new customers, potential customers and partners as they forecasted that the need for the Company’s products will grow, yet execution of closing is still slow due to the current business environment.

While interest from current and new customers is growing, which is reflected in an increasing rate of orders, a global shortage in components, which caused an increase in components prices, freight cost and longer lead-time, has created a delay in fulfilling customers’ orders which impacted the Company’s revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, the Company encourages its customers to provide their forecast for their demand and continues to maintain a comprehensive network of world-wide suppliers in order to optimize its access to critical components. In addition, during last few months the Company purchased an amount of such components to be used for sales later this year. As long as the COVID-19 pandemic continues, the components’ lead-time may be longer than normal and the shortage in components may continue or get worse.

It is difficult to predict what other impacts the COVID-19 pandemic may have on the Company.

On Track Innovations Ltd.

and Subsidiaries

US dollars, NIS and Euro in thousands, except share and per share data

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

At the beginning of the second quarter of 2021, the Company offered its shareholders to purchase additional ordinary shares as part of a rights offering (the “Rights Offering”). The Rights Offering was concluded on May 19, 2021 by issuance of shares, as mentioned in Note 10A(2). The Rights Offering included an offer to all existing shareholders of the Company to purchase additional ordinary shares in consideration for a lower exercise price than the quoted share price in the active market, reflects a bonus element that is somewhat similar to a stock dividend. Therefore, basic and diluted ESP was adjusted retroactively for the bonus element for all periods presented. In computing the adjustment factor to the EPS, the Theoretical ex-rights fair value per share was computed by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights and dividing by the number of shares outstanding after the exercise of the rights. The resulting adjusted factor was 1.069 and 1.071 for the three months and the six months ended June 30, 2020, respectively.

Note 2 – Significant Accounting Policies

Except as described in Note 2A 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, 2020.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This ASU, among other things, removes the exception to the incremental approach for intra-period allocation of tax expense when a company has a loss from continuing operations and income from other items that are not included in continuing operations, such as income from discontinued operations, or income recorded in other comprehensive income. The general rule under Accounting Standards Codification (“ASC”) 740-20-45-7 is that the tax effect of pretax income or loss from continuing operations should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. Previously, companies could consider the impact on a loss from continuing operations of items in discontinued operations or other comprehensive income. However, under the amended guidance, companies should not consider the effect of items outside of continuing operations in calculating the tax effect on continuing operations. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of this accounting standard did not have a material effect on our financial position, results of operations and cash flows.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 2 – Significant Accounting Policies (cont’d)

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 the Company for fiscal years beginning after December 15, 2022, 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.

(*) See Note 6A(2).

(*) See Note 6A(2).

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 5 – Convertible short-term loan from shareholders

On December 9, 2020, the Company entered into a loan financing agreement (the “Loan Agreement”), with Jerry L. Ivy, Jr., Descendants’ Trust (“Ivy”, or the “Lender”), the Company’s Controlling Shareholder (as such term is defined under the Israeli Companies Law, 5759-1999, as amended (the “Companies Law”)). The Loan Agreement provides that the Lender will extend a loan to the Company in the amount of up to $1,500 (the “Loan Amount”), payable in two tranches: one of $625 at the initial closing that took place on December 17, 2020, and the other of $875 at the second closing that took place on January 28, 2021. The amount lent under the Loan Agreement is secured pursuant to a debenture by a first priority floating charge over all the Company’s tangible or intangible assets and other property, the Company owns, subject only to certain permitted security interests, as set forth in Loan Agreement. The amount lent under the Loan Agreement and all accrued interest was scheduled to mature on June 17, 2021 (the “Initial Maturity Date”), and was to be payable in full on the Initial Maturity Date, provided that the maturity date could be extended by six months at the sole option of Ivy. The amount lent bears interest on all outstanding principal at an interest rate of 8.0% per annum, (the “Interest”); provided, however, that upon an extension of the maturity period beyond the Initial Maturity Date, the Interest will automatically increase, effective as of the Initial Maturity Date, to the rate of 10.0% per annum. Also, in case of an extension of the Initial Maturity Date, the accrued interest for the first six months for which the Loan Amount has been outstanding will be payable by the Company to the Lender at the time of the extension, and the accrued Interest for the extension period was to be payable by the Company on the extended maturity date. In addition, the Company may repay the amount lent, in whole and not in part, and any accrued Interest thereon, at any time prior to the Initial Maturity Date (as it may be extended), in its sole discretion. On March 2, 2021, the Company obtained shareholders’ approval to the grant of a right to Ivy, pursuant to which, at any time prior to the repayment in full of the amount lent, together with Interest accrued and all other amounts outstanding under the Agreement (the “Secured Amount”), Ivy will be entitled, at its sole discretion, to demand to convert (the “Conversion Right”) the entire Secured Amount into the Company’s Ordinary Shares, at a price per share equal to the lower of (a) $0.20 per share (subject to adjustment in the event of any bonus shares, combinations or splits) and (b) a price per share reflecting a discount to the average closing bid price of an Ordinary Share over the 20 trading days preceding the Initial Closing (the “Benchmark Price”) ($0.248), as follows: (i) if conversion occurs until March 17, 2021 (no later than three months after the initial closing), the conversion price per share will be $0.1984 (reflects discount of 20% of the Benchmark Price); (ii) if conversion occurs between March 18, 2021, and June 17, 2021 (more than three months but no later than six months after the initial closing), the conversion price per share will be $0.1736 (reflects discount of 30% of the Benchmark Price); (iii) if conversion occurs after June 17, 2021 (more than six months after the initial closing (to the extent extended in accordance with the terms of the Loan Agreement)), the conversion price per share will be $0.124 (reflects discount of 50% of the Benchmark Price); and (iv) if conversion occurs upon an event of default, the conversion price per share will be $0.124 (reflects discount of 50% of the Benchmark Price).

Pursuant to the Loan Agreement, the Conversion Right will become effective only following the approval thereof by the shareholders of the Company in accordance with the requirements of the Companies Law, which approval applies to a controlling shareholder transaction that includes a private offering that may increase the holdings of a controlling shareholder to and above 45% of the share capital of the Company, and will be deemed of no force or effect at any time prior to obtaining such Shareholders' Approval, if at all. The Company obtained such shareholders’ approval on March 2, 2021.

The Loan 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 Secured Amount shall immediately become due and payable, without the need for any notice by the Lender.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 5 - Convertible short-term loan from shareholders (cont’d)

The Loan Agreement was subsequently amended to allow for an additional lender (“the additional lender”) to lend $100 under the same terms as Ivy. Accordingly, the aggregate gross amount the Company received under the Loan Agreement is $1,600, out of which $975 took place as part of the second closing on January 28, 2021.

On June 17, 2021, the Lender, being the majority of the lenders, exercised its option to extend the Initial Maturity Date, and the parties entered into a notice of exercise of option and agreement (the “Extension Agreement”), according to which the maturity date was extended until December 17, 2021 (the “Extended Maturity Date”). Pursuant to both the Loan Agreement and the Extension Agreement, the interest rate automatically increased, effective as of the Initial Maturity Date, to the rate of 10.0% per annum (the “Extension Interest”). Any payment of interest is subject to withholding of taxes at source and the interest rates mentioned above are net of such withholding. The net amount of interest on the Loan Amount accrued through June 17, 2021 was approximately $55 (the “Interest Debt”). Under the Extension Agreement, it was agreed that the Interest Debt shall be payable on the Extended Maturity Date, while until then it shall be considered part of the Loan Amount and shall bear the Extension Interest rate. As of June 30, 2021, the Secured Amount is $1,661. In the event of a conversion of the Loan Amount, the Interest Debt shall convert into Ordinary Shares of the Company at the conversion price of $0.174 per share, and the remaining Secured Amount shall be converted at a price per share of $0.124, as originally contemplated under the Loan Agreement.

In accordance with ASC 815-15-25, Derivatives and Hedging, the conversion feature (“the conversion component”) was considered embedded derivative instrument. Since, as described above, the conversion component was required to be approved by the shareholders of the Company, the conversion

component did not qualify for the scope exception under ASC 815-10-15-74(a). Therefore, the conversion component is to be recorded separately from the loan component. The conversion component is measured both initially and in subsequent periods until obtaining the shareholders’ approval of the Conversion Right, at fair value, with changes in fair value charged to finance expenses, net.

The fair value of the conversion component at the initial closing, December 17, 2020, was estimated using the Trinomial model based on the assumptions, as follows:

Based on the Trinomial model, the fair value of the conversion component of the initial closing was $617 as of December 17, 2020. Accordingly, the loan component at the initial closing was $8 as of December 17, 2020.

There were no significant changes in the model assumptions as of December 31, 2020, compared to the assumptions as of December 17, 2020, as mentioned above. Therefore, the conversion component and the loan component were $617 and $8, respectively, as of December 31, 2020. Both components were presented as Convertible short-term loan from a controlling shareholder within the short-term liabilities as of December 31, 2020.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Based on the Trinomial model, the entire proceeds of the second closing in amount of $975 were allocated to the conversion component and the residual balance of the of the loan component of the second closing is zero.

The table below summarizes the balances of the conversion components and the loan components of the initial closing and the second closing, as follows:

On March 2, 2021, the Company obtained shareholders’ approval of the Conversion Right. At this shareholders meeting date, the fair value of the conversion component of both the initial closing and second closing was estimated using the Trinomial model based on the assumptions, as follows:

The change in the fair value of the conversion component is as follows:

Following the shareholders’ approval of the Conversion Right on March 2, 2021, the conversion component is qualifying for the scope exception under ASC 815-10-15-74(a). In accordance with ASC 815-15-35-4, since the embedded conversion option in the convertible debt no longer meets the bifurcation criteria, the fair value of the conversion component, in the amount of $3,566, was reclassified from short-term liability to shareholders equity at this approval date.

The change in the balance of the Loan component following the shareholders’ approval of the Conversion Right on March 2, 2021, is as follows:

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 6 - Commitments and Contingencies

As mentioned above, based on the agreement with SuperCom from April 2016 (which was granted an effect of a court judgment), SuperCom was liable for all the costs and liabilities arising out of this claim. Since SuperCom failed to pay the Company the amounts due, in February 2019 the Company initiated an arbitration process to collect from SuperCom, the amount paid to Merwell, as well as any complementary amounts, as may be ordered in the future.

Concurrently and subject to the fulfillment of the arbitration process between the Company and SuperCom, on August 10, 2021, the parties entered into a settlement agreement that concluded the legal proceedings with SuperCom. For further details see Notes 6A(2) below.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 6 - Commitments and Contingencies (cont’d)

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 6 - Commitments and Contingencies (cont’d)

The Company has entered into several research and development agreements, pursuant to which the Company received grants from the Israel Innovation Authority (“IIA”), and is therefore obligated to pay royalties to the IIA at a rate of 3%-3.5% of its sales up to the amounts granted (linked to the U.S. dollar with annual interest at LIBOR as of the date of approval, for programs approved from January 1, 1999 and thereafter). The total amount of grants received as of June 30, 2021, net of royalties paid, was approximately $3,400 (including accrued interest). No grants from the IIA were received during the six months ended June 30, 2021 and 2020.

There is a dispute between the Company and the IIA in the amount of approximately NIS 3,600 ($1,104) including accrued interest (while the current debt to the IIA as presented in the Company’s financial statements amounts to approximately $156) due to a claim of the IIA about miscalculations in the amount of royalties paid by the Company and the revenues on which the Company must pay royalties. The Company has not yet completed its discussions with the IIA and intends to exhaust all options in order to resolve this matter in a favorable manner. Management believes that, at the current stage, it is more likely than not that a positive resolution will be applied to this dispute. Accordingly, no additional accrual has been recorded in the financial statements in respect of this matter.

During the six months ended June 30, 2021 and 2020, there were no royalty expenses.

As of June 30, 2021, the Company granted a guarantee in an amount of $105, with an expiration date in May 2024.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 7 – Revenues

Disaggregation of revenue

The following tables disaggregate the Company’s revenues by major source based on categories that depict its nature and timing as reviewed by management for the three months ended June 30, 2021 and 2020:

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 7 – Revenues (cont’d)

Disaggregation of revenue (cont’d)

The following tables disaggregate the Company’s revenues by major source based on categories that depict its nature and timing as reviewed by management for the six months ended June 30, 2021 and 2020:

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 7 – Revenues (cont’d)

Performance obligations

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

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.

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

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

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

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.

Contract balances

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

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 7 – Revenues (cont’d)

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 is mainly attributed to ongoing services provided.

Note 8 – Discontinued operations

As described in Note 1C, the Company divested its interest in ASEC, including its Mass Transit Ticketing activity and the SmartID division and presented these activities as discontinued operations.

Set forth below are the results of the discontinued operations:

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 9 - Fair Value of Financial Instruments

The Company’s financial instruments consist mainly of cash and cash equivalents, short-term interest bearing investments, 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:

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. The liabilities held for sale as of December 31, 2020, included a long-term loan, that did not bear any interest, but taking into account the schedule of its maturities, its amount and the relatively low market rates, the difference between its carrying amount and its fair value was insignificant.

As of June 30, 2021, the Company held approximately $1,605 of short-term bank deposits (as of December 31, 2020 - $105). As of June 30, 2021 and December 31, 2020, a short-term deposit in the amount of $105 has been pledged as security in respect of guarantees granted and cannot be pledged to others or withdrawn without the consent of the bank.

Derivatives

Embedded derivatives are separated from the host contract and carried at fair value when (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, standalone instrument with the same terms would qualify as a derivative instrument. The derivative is measured both initially and in subsequent periods at fair value, with changes in fair value charged to financial expenses, net. As to embedded derivatives arising from the issuance of convertible debentures, see Note 5. Transaction expenses related to the embedded derivatives are recognized as financial expenses at the date of the initial recognition.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 10 – Equity

As part of this Agreement, in December 2019 and January 2020, the Company issued 5,460,000 and 1,040,000 ordinary shares, respectively, for aggregate gross proceeds of $1,092 and $208, respectively. Under the term of the Agreement and following the issuance of those shares, the Company appointed one representative to its Board of Directors (the “Board”), designated by Ivy. Also, pursuant to the Agreement, Ivy has a right to purchase any future equity securities offered by the Company, except with respect to certain exempt issuances as set forth in the Agreement.

The issuance of the remaining 6,000,000 ordinary shares (the “Subsequent Closing”) for aggregate gross proceeds of $1,200 took place in April 2020, following the approval by the Company’s shareholders on April 14, 2020, of the resolutions detailed below, that were required for the consummation of the Subsequent Closing under the Agreement and the applicable law: (i) an increase in the number of the ordinary shares authorized for issuance from 50,000,000 to 100,000,000; (ii) the issuance of the ordinary shares to Ivy following which Ivy will hold 25% or more of the total voting rights at general meetings of the shareholders of the Company; and (iii) the election of the representative designated by Ivy to the Board.

The issuance costs were approximately $31, $8 and $111 during the three months ended June 30, 2020, March 31, 2020, and December 31, 2019, respectively.

In addition, pursuant to the terms of the Agreement, on May 5, 2020, after the consummation of the Subsequent Closing, the Board appointed an additional representative designated by Ivy. The appointment of such designee shall remain valid through the next general meeting of the Company’s shareholders or as set forth in the Articles of Association of the Company.

The Rights Offering was concluded on May 19, 2021 and was oversubscribed. Accordingly, the Company issued an aggregate of 18,965,516 Ordinary Shares (the “Issued Shares”) for aggregate gross proceeds to the Company of $3,300. The Issued Shares included 10,869,304 shares that were issued to Ivy and its affiliates, upon exercise of its basic subscription rights and over-subscription rights. Following the Rights Offering, Ivy and its affiliates own 35.9% of issued and outstanding share capital as of June 30, 2021.

The issuance costs derived from the Rights Offering were approximately $128.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 10 – Equity (cont’d)

During each of the six month periods ended June 30, 2021 and June 30, 2020, 640,000 and 814,000 options were granted, respectively. The vesting period for the options is three years. The average exercise prices for the options that were granted during the six months ended June 30, 2021 and June 30, 2020 are $0.23 and $0.24, 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 six months ended June 30, 2021 and June 30, 2020 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:

The Company’s options activity (including options to non-employees) and options outstanding and options exercisable as of December 31, 2020 and June 30, 2021, are summarized in the following table:

The weighted average fair value of options granted during the six months ended June 30, 2021 and during the six months ended June 30, 2020 is $0.14 and $0.12, respectively, per option. The aggregate intrinsic value of outstanding options as of June 30, 2021 and December 31, 2020 is approximately $65 and $5, respectively. The aggregate intrinsic value of exercisable options as of June 30, 2021 and December 31, 2020 $12 and $2, respectively.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

Note 10 – Equity (cont’d)

The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of June 30, 2021:

As of June 30, 2021, there was approximately $153 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 1.41 years.

During the three months ended June 30, 2021 and June 30, 2020, the Company recorded stock-based compensation expenses in the amount of $15 and $16, respectively, in accordance with ASC 718, Compensation-Stock Compensation.

During the six months ended June 30, 2021 and June 30, 2020, the Company recorded stock-based compensation expenses in the amount of $29 and $28, respectively, in accordance with ASC 718, Compensation-Stock Compensation.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data

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 (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.

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars, NIS and Euro in thousands, except share and per share data