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, 2017March 31, 2020
☐ 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.) |
Box | 2069200 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:+ 972-4-6868000
| Trading Symbol(s) | Name of each exchange on which registered | |||
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 pastpreceding 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 registrationregistrant was required to submit and post 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”,filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| 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 ☒
StateIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 41,134,37853,824,377 Ordinary Shares outstanding as of November 6, 2017.May 8, 2020.
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 | 11 | ||
| Part II - Other Information | ||||
| Item | Legal Proceedings | |||
| Item 1A. | Risk Factors | 12 | ||
| Item 5. | Other Information | 13 | ||
| Item 6. | Exhibits | 14 | ||
| Signatures | 15 | |||
i
PART I - FINANCIAL INFORMATION
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2017March 31, 2020
(Unaudited)
1
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Financial Statements as of September 30, 2017March 31, 2020
Contents
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, | |||||||||||||||
| 2017 | 2016 | March 31 | December 31 | |||||||||||||
| 2020 | 2019 | |||||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 6,000 | $ | 5,952 | $ | 2,637 | $ | 2,543 | ||||||||
| Short-term investments | 2,667 | 5,585 | 805 | 2,305 | ||||||||||||
| Trade receivables (net of allowance for doubtful accounts of $638 and $720 as of September 30, 2017 and December 31, 2016, respectively) | 5,470 | 5,620 | ||||||||||||||
| Trade receivables (net of allowance for doubtful accounts of $600 and $612 as of March 31, 2020 and December 31, 2019, respectively) | 3,043 | 2,430 | ||||||||||||||
| Other receivables and prepaid expenses | 3,963 | 1,638 | 1,601 | 1,822 | ||||||||||||
| Inventories | 3,818 | 3,069 | 3,025 | 3,332 | ||||||||||||
| Total current assets | 21,918 | 21,864 | 11,111 | 12,432 | ||||||||||||
| Long-term restricted deposit for employees benefit | 494 | 453 | ||||||||||||||
| Long term restricted deposit for employee benefits | 462 | 477 | ||||||||||||||
| Severance pay deposits | 353 | 322 | 371 | 383 | ||||||||||||
| Property, plant and equipment, net | 5,824 | 5,788 | 3,371 | 3,694 | ||||||||||||
| Intangible assets, net | 337 | 278 | 740 | 733 | ||||||||||||
| Right-of-use assets due to operating leases | 3,728 | 2,134 | ||||||||||||||
| Total Assets | $ | 28,926 | $ | 28,705 | $ | 19,783 | $ | 19,853 | ||||||||
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, | |||||||||||||||
| 2017 | 2016 | March 31 | December 31 | |||||||||||||
| 2020 | 2019 | |||||||||||||||
| Liabilities and Equity | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Short-term bank credit and current maturities of long-term bank loans | $ | 4,389 | $ | 4,369 | $ | 2,609 | $ | 2,478 | ||||||||
| Trade payables | 6,898 | 6,957 | 3,094 | 4,126 | ||||||||||||
| Other current liabilities | 2,482 | 2,822 | 3,337 | 3,054 | ||||||||||||
| Total current liabilities | 13,769 | 14,148 | $ | 9,040 | $ | 9,658 | ||||||||||
| Long-Term Liabilities | ||||||||||||||||
| Long-term loans, net of current maturities | 889 | 1,215 | 18 | 22 | ||||||||||||
| Long-term liabilities due to operating leases, net of current maturities | 2,861 | 1,483 | ||||||||||||||
| Accrued severance pay | 914 | 811 | 864 | 884 | ||||||||||||
| Deferred tax liability | 477 | 373 | 361 | 416 | ||||||||||||
| Total long-term liabilities | 2,280 | 2,399 | 4,104 | 2,805 | ||||||||||||
| Total Liabilities | 16,049 | 16,547 | 13,144 | 12,463 | ||||||||||||
| Commitments and Contingencies | ||||||||||||||||
| Commitments and Contingencies, see note 6 | ||||||||||||||||
| Equity | ||||||||||||||||
| Shareholders' Equity | ||||||||||||||||
| Ordinary shares of NIS 0.1 par value: Authorized: 50,000,000 shares as of September 30, 2017 and December 31, 2016; issued: 42,313,077 and 42,243,075 shares as of September 30, 2017 and December 31, 2016, respectively; outstanding: 41,134,378 and 41,064,376 shares as of September 30, 2017 and December 31, 2016, respectively | 1,063 | 1,061 | ||||||||||||||
| Ordinary shares of NIS 0.1 par value: Authorized – 50,000,000 shares as of March 31, 2020 and December 31, 2019; issued: 49,003,076 and 47,963,076 shares as of March 31, 2020 and December 31, 2019, respectively; outstanding: 47,824,377 and 46,784,377 shares as of March 31, 2020 and December 31, 2019, respectively | 1,256 | 1,226 | ||||||||||||||
| Additional paid-in capital | 224,676 | 224,415 | 226,152 | 225,970 | ||||||||||||
| Treasury shares at cost - 1,178,699 shares as of September 30, 2017 and December 31, 2016 | (2,000 | ) | (2,000 | ) | ||||||||||||
| Treasury shares at cost - 1,178,699 shares as of March 31, 2020 and December 31, 2019 | (2,000 | ) | (2,000 | ) | ||||||||||||
| Accumulated other comprehensive loss | (876 | ) | (1,236 | ) | (1,268 | ) | (974 | ) | ||||||||
| Accumulated deficit | (209,986 | ) | (210,082 | ) | (217,501 | ) | (216,832 | ) | ||||||||
| Total Equity | 12,877 | 12,158 | 6,639 | 7,390 | ||||||||||||
| Total Liabilities and Equity | $ | 28,926 | $ | 28,705 | $ | 19,783 | $ | 19,853 | ||||||||
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, | |||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | Three months ended March 31 | ||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||
| Sales | $ | 3,445 | $ | 3,463 | $ | 11,871 | $ | 10,409 | $ | 3,396 | $ | 1,722 | ||||||||||||
| Licensing and transaction fees | 1,225 | 2,133 | 3,765 | 4,569 | 1,055 | 1,291 | ||||||||||||||||||
| Total revenues | 4,670 | 5,596 | 15,636 | 14,978 | 4,451 | 3,013 | ||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Cost of sales | 2,192 | 2,557 | 7,468 | 7,167 | 2,273 | 1,370 | ||||||||||||||||||
| Total cost of revenues | 2,192 | 2,557 | 7,468 | 7,167 | 2,273 | 1,370 | ||||||||||||||||||
| Gross profit | 2,478 | 3,039 | 8,168 | 7,811 | 2,178 | 1,643 | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Research and development | 823 | 604 | 2,414 | 2,072 | 898 | 871 | ||||||||||||||||||
| Selling and marketing | 1,332 | 1,300 | 4,166 | 3,974 | 1,162 | 1,285 | ||||||||||||||||||
| General and administrative | 758 | 787 | 2,553 | 2,613 | 957 | 965 | ||||||||||||||||||
| Other expenses | - | 83 | - | 83 | ||||||||||||||||||||
| Total operating expenses | 2,913 | 2,774 | 9,133 | 8,742 | 3,017 | 3,121 | ||||||||||||||||||
| Operating (loss) income from continuing operations | (435 | ) | 265 | (965 | ) | (931 | ) | |||||||||||||||||
| Financial expenses, net | (126 | ) | (30 | ) | (236 | ) | (185 | ) | ||||||||||||||||
| Operating loss from continuing operations | (839 | ) | (1,478 | ) | ||||||||||||||||||||
| Financial income (expenses), net | 168 | (69 | ) | |||||||||||||||||||||
| Profit (loss) from continuing operations before taxes on income | (561 | ) | 235 | (1,201 | ) | (1,116 | ) | |||||||||||||||||
| Income tax | (12 | ) | (28 | ) | (68 | ) | (60 | ) | ||||||||||||||||
| Loss from continuing operations before taxes on income | (671 | ) | (1,547 | ) | ||||||||||||||||||||
| Net (loss) income from continuing operations | (573 | ) | 207 | (1,269 | ) | (1,176 | ) | |||||||||||||||||
| Net income (loss) from discontinued operations | 1,441 | (279 | ) | 1,365 | 1,525 | |||||||||||||||||||
| Income tax benefits (expenses) | 13 | (5 | ) | |||||||||||||||||||||
| Net income (loss) | 868 | (72 | ) | 96 | 349 | |||||||||||||||||||
| Loss from continuing operations | (658 | ) | (1,552 | ) | ||||||||||||||||||||
| Loss from discontinued operations | (11 | ) | (193 | ) | ||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | 5 | - | 32 | ||||||||||||||||||||
| Net income (loss) attributable to shareholders | $ | 868 | $ | (67 | ) | $ | 96 | $ | 381 | |||||||||||||||
| Net loss | $ | (669 | ) | $ | (1,745 | ) | ||||||||||||||||||
| Basic and diluted net gain (loss) attributable to shareholders per ordinary share | ||||||||||||||||||||||||
| Basic and diluted net loss attributable to shareholders per ordinary share | ||||||||||||||||||||||||
| From continuing operations | (0.01 | ) | 0.01 | (0.03 | ) | (0.03 | ) | $ | (0.01 | ) | $ | (0.04 | ) | |||||||||||
| From discontinued operations | 0.03 | (0.01 | ) | 0.03 | 0.04 | $ | * | $ | * | |||||||||||||||
| $ | 0.02 | $ | (* | ) | (* | ) | $ | 0.01 | $ | (0.01 | ) | $ | (0.04 | ) | ||||||||||
| Weighted average number of ordinary shares used in computing basic net (loss) income per ordinary share | 41,122,965 | 40,914,258 | 41,099,603 | 40,895,268 | ||||||||||||||||||||
| Weighted average number of ordinary shares used in computing diluted net (loss) income per ordinary share | 41,122,965 | 41,667,258 | 41,099,603 | 40,895,268 | ||||||||||||||||||||
| Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share | 47,790,091 | 41,294,377 | ||||||||||||||||||||||
(*)* 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 Income (Loss)Loss
US dollars in thousands
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||
| Net income (loss) | $ | 868 | $ | (72 | ) | $ | 96 | $ | 349 | |||||||
| Foreign currency translation adjustments | 28 | 110 | 360 | 88 | ||||||||||||
| Total comprehensive income | $ | 896 | $ | 38 | $ | 456 | $ | 437 | ||||||||
| Comprehensive loss attributable to the non-controlling interest | - | 5 | - | 32 | ||||||||||||
| Total comprehensive income attributable to shareholders | $ | 896 | $ | 43 | $ | 456 | $ | 469 | ||||||||
| Three months ended March 31 | ||||||||
| 2020 | 2019 | |||||||
| Total comprehensive loss: | ||||||||
| Net loss | $ | (669 | ) | $ | (1,745 | ) | ||
| Foreign currency translation adjustments | (294 | ) | (63 | ) | ||||
| Total comprehensive loss | $ | (963 | ) | $ | (1,808 | ) | ||
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 other | ||||||||||||||||||||||||||||||||
| Number of | Additional | Treasury | comprehensive | |||||||||||||||||||||||||||||
| Shares | Share | paid-in | Shares | Income | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||||
| issued | capital | capital | (at cost) | (loss) | deficit | interest | equity | |||||||||||||||||||||||||
| Balance as of December 31, 2015 | 42,014,673 | $ | 1,055 | $ | 225,925 | $ | (2,000 | ) | $ | (1,084 | ) | $ | (209,254 | ) | $ | (1,819 | ) | $ | 12,823 | |||||||||||||
| Changes during the nine month period ended September 30, 2016: | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 15,000(** | ) | (* | ) | 174 | - | - | - | - | 174 | ||||||||||||||||||||||
| Exercise of options and warrants | 90,402 | 2 | 35 | - | - | - | - | 37 | ||||||||||||||||||||||||
| Increase in the ownership rate in subsidiaries (***) | - | - | (1,920 | ) | - | - | - | 1,851 | (69 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 88 | - | - | 88 | ||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 381 | (32 | ) | 349 | |||||||||||||||||||||||
| Balance as of September 30, 2016 | 42,120,075 | $ | 1,057 | $ | 224,214 | $ | (2,000 | ) | $ | (996 | ) | $ | (208,873 | ) | $ | - | $ | 13,402 | ||||||||||||||
| Balance as of December 31, 2016 | 42,243,075 | $ | 1,061 | $ | 224,415 | $ | (2,000 | ) | $ | (1,236 | ) | $ | (210,082 | ) | $ | - | $ | 12,158 | ||||||||||||||
| Changes during the nine month period ended September 30, 2017: | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 45,000(** | ) | 2 | 236 | - | - | - | - | 238 | |||||||||||||||||||||||
| Exercise of options | 25,002 | (*) | 25 | - | - | - | - | 25 | ||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 360 | - | - | 360 | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | 96 | - | 96 | ||||||||||||||||||||||||
| Balance as of September 30, 2017 | 42,313,077 | $ | 1,063 | $ | 224,676 | $ | (2,000 | ) | $ | (876 | ) | $ | (209,986 | ) | $ | - | $ | 12,877 | ||||||||||||||
| Number of Shares issued | Share capital | Additional paid-in capital | Treasury Shares (at cost) | Accumulated other comprehensive Income (loss) | Accumulated deficit | Total equity | ||||||||||||||||||||||
| Balance as of December 31, 2018 | 42,473,076 | $ | 1,068 | $ | 225,022 | $ | (2,000 | ) | $ | (956 | ) | $ | (210,943 | ) | $ | 12,191 | ||||||||||||
| Changes during the three month period ended March 31, 2019: | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 46 | - | - | - | 46 | |||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | (63 | ) | - | (63 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (1,745 | ) | (1,745 | ) | |||||||||||||||||||
| Balance as of March 31, 2019 | 42,473,076 | $ | 1,068 | $ | 225,068 | $ | (2,000 | ) | $ | (1,019 | ) | $ | (212,688 | ) | $ | 10,429 | ||||||||||||
| Balance as of December 31, 2019 | 47,963,076 | $ | 1,226 | $ | 225,970 | $ | (2,000 | ) | $ | (974 | ) | $ | (216,832 | ) | $ | 7,390 | ||||||||||||
| Changes during the three month period ended March 31, 2020: | ||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $8 | 1,040,000 | 30 | 170 | - | - | - | 200 | |||||||||||||||||||||
| Stock-based compensation | - | - | 12 | - | - | - | 12 | |||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | (294 | ) | - | (294 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (669 | ) | (669 | ) | |||||||||||||||||||
| Balance as of March 31, 2020 | 49,003,076 | $ | 1,256 | $ | 226,152 | $ | (2,000 | ) | $ | (1,268 | ) | $ | (217,501 | ) | $ | 6,639 | ||||||||||||
(*) Less than $1.
(**) See Note 8C.
(***) See Note 1C(2).
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-6
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash Flows
US dollars in thousands
| Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from continuing operating activities | ||||||||
| Net loss from continuing operations | $ | (1,269 | ) | $ | (1,176 | ) | ||
| 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 | 238 | 174 | ||||||
| Depreciation | 878 | 911 | ||||||
| Deferred tax, net | 37 | 60 | ||||||
| (Gain) loss on sale of property and equipment | (9 | ) | 83 | |||||
| Accrued interest and linkage differences, net | (41 | ) | 19 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accrued severance pay, net | 72 | (152 | ) | |||||
| Decrease (increase) in trade receivables, net | 187 | (1,376 | ) | |||||
| (Increase) in other receivables and prepaid expenses | (435 | ) | (16 | ) | ||||
| (Increase) decrease in inventories | (710 | ) | 246 | |||||
| (Decrease) increase in trade payables | (611 | ) | 1,024 | |||||
| (Decrease) in other current liabilities | (777 | ) | (408 | ) | ||||
| Net cash used in continuing operating activities | (2,440 | ) | (611 | ) | ||||
| Cash flows from continuing investing activities | ||||||||
| Purchase of property and equipment | (160 | ) | (185 | ) | ||||
| Proceeds from sale of property and equipment | 14 | 1,779 | ||||||
| Change in short-term investments, net | 2,917 | (502 | ) | |||||
| Investment in capitalized product costs | (185 | ) | (139 | ) | ||||
| Proceeds from restricted deposit for employees benefit | 44 | 142 | ||||||
| Net cash provided by continuing investing activities | 2,630 | 1,095 | ||||||
| Cash flows from continuing financing activities | ||||||||
| (Decrease) increase in short-term bank credit, net | (72 | ) | 287 | |||||
| Proceeds from long-term bank loans | - | 27 | ||||||
| Repayment of long-term bank loans | (469 | ) | (1,368 | ) | ||||
| Proceeds from exercise of options and warrants | 25 | 37 | ||||||
| Net cash used in continuing financing activities | (516 | ) | (1,017 | ) | ||||
| Cash flows from discontinued operations | ||||||||
| Net cash used in discontinued operating activities | (86 | ) | (183 | ) | ||||
| Net cash provided by discontinued investing activities | - | 2,152 | ||||||
| Total net cash (used in) provided by discontinued operations | (86 | ) | 1,969 | |||||
| Effect of exchange rate changes on cash and cash equivalents | 460 | 51 | ||||||
| Increase in cash and cash equivalents | 48 | 1,487 | ||||||
| Cash and cash equivalents at the beginning of the period | 5,952 | 5,450 | ||||||
| Cash and cash equivalents at the end of the period | $ | 6,000 | $ | 6,937 | ||||
| Three months ended March 31 | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from continuing operating activities | ||||||||
| Net loss from continuing operations | $ | (658 | ) | $ | (1,552 | ) | ||
| Adjustments required to reconcile net loss to net cash provided by continuing operating activities: | ||||||||
| Stock-based compensation related to options issued to employees and others | 12 | 46 | ||||||
| Gain on sale of property and equipment, net | - | (2 | ) | |||||
| Accrued interest and linkage differences, net | (156 | ) | (12 | ) | ||||
| Depreciation and amortization | 307 | 320 | ||||||
| Deferred tax benefits, net | (15 | ) | (10 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Change in accrued severance pay, net | (8 | ) | 29 | |||||
| (Increase) decrease in trade receivables, net | (697 | ) | 1,323 | |||||
| Decrease in other receivables and prepaid expenses | 142 | 264 | ||||||
| Decrease (increase) in inventories | 274 | (457 | ) | |||||
| (Decrease) increase in trade payables | (917 | ) | 423 | |||||
| Increase (decrease) in other current liabilities | 584 | (186 | ) | |||||
| Net cash (used in) provided by continuing operating activities | (1,132 | ) | 186 | |||||
| Cash flows from continuing investing activities | ||||||||
| Purchase of property and equipment and intangible assets | (168 | ) | (163 | ) | ||||
| Proceeds from sale of property, plant and equipment | - | 10 | ||||||
| Change in short-term investments, net | 1,508 | 6 | ||||||
| Proceeds from restricted deposit for employee benefits | - | 10 | ||||||
| Net cash provided by (used in) continuing investing activities | 1,340 | (137 | ) | |||||
| Cash flows from continuing financing activities | ||||||||
| Increase in short-term bank credit, net | 160 | 372 | ||||||
| Repayment of long-term loans | (5 | ) | (119 | ) | ||||
| Proceeds from issuance of shares, net of issuance costs | 200 | - | ||||||
| Net cash provided by continuing financing activities | 355 | 253 | ||||||
| Cash flows from discontinued operations | ||||||||
| Net cash used in discontinued operating activities | (334 | ) | (1,231 | ) | ||||
| Total net cash used in discontinued operations | (334 | ) | (1,231 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (135 | ) | (57 | ) | ||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 94 | (986 | ) | |||||
| Cash, cash equivalents and restricted cash - beginning of the period | 2,648 | 5,105 | ||||||
| Cash, cash equivalents and restricted cash - end of the period | $ | 2,742 | $ | 4,119 | ||||
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 (cont’d)
US dollars in thousands
| Nine months ended September 30, | Three months ended March 31 | |||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
Supplementary cash flows activities: | ||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||
| Interest paid | $ | 140 | $ | 148 | $ | 23 | $ | 4 | ||||||||
| Income taxes paid | $ | 31 | $ | - | $ | 31 | $ | 69 | ||||||||
| Supplemental disclosures of non-cash flow information | ||||||||||||||||
| Payables due to purchase of property and equipment and intangible assets | $ | 174 | $ | - | ||||||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-8
On Track Innovations Ltd.
and its 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
| 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. During the nine-month period ended September 30, 2017, the Company completed the liquidation of its wholly-owned subsidiaries, Softchip Israel Ltd. and Softchip Technologies (3000) Ltd., and these entities are no longer part of the Group.
The Company’s ordinary shares are listed for trading on the NASDAQ Capital MarketOTCQX market (formerly listed on the NASDAQ GlobalNasdaq Capital Market until April 13, 2016)October 31, 2019).
At March 31, 2020, the Company operates in two operating segments: (a) Retail and Mass Transit Ticketing, and (b) Petroleum. See Note 11. During December 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, 2016.2019.
In the opinion of management, all adjustments considered necessary for a fair presentation,statement, consisting of normal recurring adjustments, have been included. Operating results for the nine-monththree month period ended September 30, 2017March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2020.
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.
F-9
On Track Innovations Ltd.
and its 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)
| C. | Divestiture of operations |
| 1. | In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property |
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. The evidence in the arbitration was heard on March 6, 2018, and 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. 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).
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 three months ended March 31, 2020 and 2019.
| 2. | In December 2018, the Company completed the sale of its medical smart cards operation (“ |
F-10
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
The Company has had recurring losses and has an accumulated deficit as of March 31, 2020 of $217,501. The Company also has a payable balance on its short-term loan of $2,609 as of March 31, 2020 that is due within the next 12 months.
Since inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities, borrowings from banks, cash 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 $3,442 (of which an amount of $105 has been pledged as securities for certain items) as of March 31, 2020. The Company believes that it has sufficient capital resources to fund its operations for at least the next 12 months.
Further, as disclosed in Note 10A, subsequent to the balance sheet date the Company received funds in a total amount of $1,200 in consideration for the issuance of 6,000,000 ordinary shares, all in accordance with the terms and provisions of the Agreement (as defined in Note 10A below).
In connection with the outbreak of the Corona Virus (COVID-19) (“COVID-19”), the Company has taken steps to protect its workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include work from home where possible, minimizing face-to-face meetings and utilizing video conference as much as possible, social distancing at facilities and elimination of all international travel. The Company continues to comply with all local health directives.
As of the reporting date, the main impact of the COVID-19 pandemic is a decrease in the Company’s revenues derived from Mass Transit activity in the Polish market. The decrease of approximately $300 in this operation, that was relatively stable during the year preceding the COVID-19 outbreak, started mainly in March 2020 and is expected to continue for the foreseeable future. As a response to this effect, the Company has taken steps to reduce some costs that are not essential under the current circumstances.
Another impact of COVID-19 has been on product delivery, where components’ procurement lead time is longer and a shortage in components has grown as the duration of the COVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortage in components may continue or get worse. Therefore, the Company maintains a comprehensive network of world-wide suppliers.
As for the Company’s Retail activity, the Company has seen a higher interest from a growing number of 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.
It is difficult to predict what other impacts the COVID-19 pandemic may have on the Company.
Subsequent to the balance sheet date, based on Polish government regulations introduced in relation to the COVID-19 pandemic, ASEC S.A. (Spolka Akcyjna), the Polish subsidiary of the Company (hereinafter – “ASEC”), received the consent of PKO Bank Polski, a Polish bank (hereinafter – “the Lender”), to postpone the maturity date of a secured loan, provided to ASEC in May 2019, in the amount of$2,000, by six months to November 22, 2020 instead of May 23, 2020, as the loan agreement provided. The loan will be payable in full on maturity (with the option of early repayment by ASEC) and the interest of 1-month LIBOR plus 1.8% is paid on a monthly basis. 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 Lender may reduce the amount of the loan, demand additional security or terminate the agreement.
F-11
On Track Innovations Ltd.
and its 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
Theseinterim 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, 2016.2019.
Recent accounting pronouncements
| 1. | In |
| 2. | In |
F-12
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 3 - Other Receivables and Prepaid Expenses
| September 30, | December 31, | March 31 | December 31 | |||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Government institutions | $ | 476 | $ | 322 | $ | 404 | $ | 414 | ||||||||
| Prepaid expenses | 412 | 526 | 301 | 224 | ||||||||||||
| Receivables under contractual obligations to be transferred to others (*) | 383 | 346 | 94 | 330 | ||||||||||||
| Other receivables (see also Note 6). | 2,692 | 444 | ||||||||||||||
| Suppliers advance | 549 | 544 | ||||||||||||||
| Other receivables | 253 | 310 | ||||||||||||||
| $ | 3,963 | $ | 1,638 | $ | 1,601 | $ | 1,822 | |||||||||
(*) The Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities.
| (*) | 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, | March 31 | December 31 | |||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Employees and related expenses | $ | 592 | $ | 1,011 | $ | 596 | $ | 613 | ||||||||
| Accrued expenses | 1,430 | 1,473 | 809 | 887 | ||||||||||||
| Customer advances | 224 | 249 | 908 | 111 | ||||||||||||
| Other current liabilities | 236 | 89 | ||||||||||||||
| Short-term liabilities due to operating leases and current maturities | 734 | 686 | ||||||||||||||
| Other current liabilities (*) | 290 | 757 | ||||||||||||||
| $ | 2,482 | $ | 2,822 | $ | 3,337 | $ | 3,054 | |||||||||
| (*) | See Note 6A(5). |
F-13
On Track Innovations Ltd.
and its 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 - Leases
The Company leases a limited number of assets, mainly offices and cars for use in its operations. The Company adopted the 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 March 31, 2020, right-of-use assets due to operating leases are $3,728 (as of December 31, 2019 - $2,134) and the liabilities due to operating leases are $3,595 (as of December 31, 2019 - $2,169), out of which $2,861 are classified as long-term liabilities and $734 are classified as current liabilities (see Note 4).
The right-of-use assets and the liabilities due to operating leases as of March 31, 2020, include assets and liabilities in the amount of $1,787 and $1,732, respectively, that derive from the lease commencement of the headquarters office in Yokne’am, Israel (in lieu of the previous leased headquarters building in Rosh Pina) in January 2020. The operating lease period of this office is five years (excluding the extension-period, as mentioned in the agreement). The total annual rent expenses of this building, including management fees and excluding construction costs-reimbursement payments, is approximately NIS 595 ($167) during the lease period and approximately NIS 654 ($183) during the extension-period, if extended. The construction costs-reimbursement payments are approximately NIS 2,913 ($817), out of which 50% will be paid during the lease period. If the Company leases this office during the extension-period of five years, the rest of the 50% costs-reimbursement payments will be paid during the extension-period. Otherwise, the rest of the 50% costs- reimbursement payments will be paid at the end of 2024.
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 ten years as of March 31, 2020. The weighted average remaining lease term is 3.4 years as of March 31, 2020.
The following is a schedule of the maturities of operating lease liabilities for the next five years as of March 31, 2020, and thereafter, as were taken into account in the calculation of the operating lease liabilities as of March 31, 2020:
| Remainder of 2020 | $ | 737 | ||
| 2021 | 857 | |||
| 2022 | 688 | |||
| 2023 | 405 | |||
| 2024 | 327 | |||
| Thereafter | 1,191 | |||
| Total leases payments | 4,205 | |||
| Less - discount | 610 | |||
| Operating lease liabilities | $ | 3,595 |
As of March 31, 2020, the weighted average discount rate of the operating leases is approximately 5%.
Operating lease costs and cash paid during the three months ended March 31, 2020 and 2019, for amounts included in the measurement of the lease liabilities were approximately $262 and $180, 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.
F-14
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 56 - Commitments and Contingencies
| A. | Legal claims |
| 1. | In June 2013, prior to the |
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 March 31, 2020 and December 31, 2019, in accordance with accounting standard ASC 450, Contingencies.
| 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 approximately $1,618, and there might be additional amounts to be claimed in the future, as additional information might be found from time to time. On March 4, 2020, the Company submitted a response to this complementary claim, rejecting Merwell’s claims. As mentioned above, the Company is conducting in parallel a separate arbitration process against SuperCom in that matter, as the Company deems SuperCom to be liable for all the costs and liabilities arising out of this claim. 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-15
On Track Innovations Ltd.
and its 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)
| A. | Legal claims (cont’d) |
| 3. | In October |
F-16
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 56 - Commitments and Contingencies (cont’d)
| A. | Legal claims (cont’d) |
| 5. | During the year ended December 31, 2017, the Company recorded income of approximately $1,600 based on a judgment issued by the Israeli Central District Court regarding the Company’s lawsuit against Harel Insurance Company Ltd. (“Harel”) for damages incurred by the Company due to flooding in a subcontractor’s manufacturing site in 2011. The judgment determined that this amount of $1,600, net be awarded to cover the Company’s damages. On October 10, 2017, Harel submitted its appeal of the judgment to the Israeli Supreme Court as well as a request for stay of judgment. |
On January 26, 2020, Harel and the Company agreed to the offer of the Israeli Supreme Court, as made by way of settlement in which the Company will pay back to Harel the sum of NIS 1,907 (approximately $553) in three monthly equal installments starting February 26, 2020. Accordingly, the Company recorded loss of $71 and $482 within the net loss from continuing operations and within the net loss from discontinued operations, respectively, in the fourth quarter of 2019. As of May 12, 2020, we paid all the settlement amount.
| 6. | Regarding an additional legal claim, see Notes 1C(1). |
| B. | Guarantees |
As of September 30, 2017,March 31,2020, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $352.$376. The expiration dates of the guarantees range from October 2017May 2020 to June 2019.September 2021.
F-17
On Track Innovations Ltd.
and its 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 disaggregates the Company’s revenue by major source based on categories that depict its nature and timing as reviewed by management for the three months ended March 31,2020 and 2019:
| Three months ended March 31 | ||||||||||||
| 2020 | ||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $2,469 | $ | - | $2,469 | ||||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | 314 | 571 | 885 | |||||||||
| Licensing fees, transaction fees and services (B2) | 870 | 227 | 1,097 | |||||||||
| 1,184 | 798 | 1,982 | ||||||||||
| Total revenues | $ | 3,653 | $ | 798 | $ | 4,451 | ||||||
| Three months ended March 31 | ||||||||||||
| 2019 | ||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | (*)784 | $ | - | $ | (*)784 | ||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | (*)192 | 505 | (*)697 | |||||||||
| Licensing fees, transaction fees and services (B2) | 1,217 | 315 | 1,532 | |||||||||
| (*)1,409 | 820 | (*)2,229 | ||||||||||
| Total revenues | $ | 2,193 | $ | 820 | $ | 3,013 | ||||||
| (*) | Reclassified |
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.
F-18
On Track Innovations Ltd.
and its 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 (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.
Contract balances
| March 31 | December 31 | |||||||
| 2020 | 2019 | |||||||
| Trade receivables, net of allowance for doubtful accounts | $ | 3,043 | $ | 2,430 | ||||
| Customer advances | $ | 908 | $ | 111 | ||||
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 is mainly attributed to ongoing services provided.
F-19
On Track Innovations Ltd.
and its 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 -8 – Discontinued operations
As described in Note 1C, the Company divested its interest in the SmartID division and its parking segment,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, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | - | 184 | - | 768 | ||||||||||||
| Expenses | (11 | ) | (327 | ) | (94 | ) | (1,246 | ) | ||||||||
| Other (expenses) income, net | 1,452(* | ) | (136 | ) | 1,459(* | ) | 2,003 | |||||||||
| Net profit (loss) from discontinued operations | 1,441 | (279 | ) | 1,365 | 1,525 | |||||||||||
(*) On August 23, 2017, a judgment was issued by the Israeli Central District Court regarding the Company’s lawsuit against Harel Insurance Company Ltd. (“Harel”) for damages incurred by the Company due to flooding in a subcontractor’s manufacturing site. The judgment determined that an amount of $1,600, net be awarded to cover the Company’s damages. On October 10, 2017, Harel submitted its appeal of the judgment to the Israeli Supreme Court as well as a request for stay of judgment. On October 30, 2017, the Court denied the requested stay. Based on the advice of counsel, the Company currently believes that there are sufficient grounds on which to uphold the District Court’s ruling and, as such, Harel’s appeal will be denied.
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
| Three months ended March 31 | ||||||||
| 2020 | 2019 | |||||||
| Revenues | $ | - | $ | - | ||||
| Expenses | (11 | ) | (193 | ) | ||||
| Net loss from discontinued operations | $ | (11 | ) | $ | (193 | ) | ||
Note 79 - Fair Value of Financial Instruments
The Company'sCompany’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:
| ● | 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. |
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'sliability’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, useddetermined that the following methods and assumptions:
The carrying amounts of cash and cash equivalents, short-term interest bearing investments, trade receivables, short-termshort and long term bank creditloans 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, 2017, the fair value of bank loans with fixed interest rates did not differ materially from the carrying amount.
As of September 30, 2017,March 31, 2020, the Company held approximately $2,667$805 of short-term bank deposits (as of December 31, 2016, $5,585)2019 - $2,305). As of September 30, 2017March 31, 2020 and December 31, 2016,2019, short-term deposits in the amount of $1,548$105 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.
F-20
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 8 -10 – Equity
| A. | Share capital |
On December 23, 2019, the Company entered into a share purchase agreement (hereinafter – the “Agreement”) with Jerry L Ivy, Jr. Descendants Trust (hereinafter - “Ivy”) and two other investors who are members of the Company’s Board of Directors (collectively together with Ivy – “Investors”). The Agreement relates to a private placement of an aggregate of up to 12,500,000 ordinary shares of the Company for aggregate gross proceeds to the Company of up to $2,500.
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 proceed of $1,092 and $208, respectively. The issuance costs were approximately $111 during the second half of 2019. The issuance costs in the three months ended March 31, 2020 were $8. Under the terms of the Agreement and following the issuance of those shares, the Company appointed one representative to its Board of Directors, 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 (hereinafter – 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 Company’s Board of Directors.
In addition, pursuant to the terms of the Agreement, on May 5, 2020, after the consummation of the Subsequent Closing, the Company’s Board of Directors 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.
F-21
On Track Innovations Ltd.
and its 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)
| B. | Stock option plans |
During each of the nine monthsthree-month periods ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, 204,000 and 100,000 and 270,000 options were granted, respectively. The vesting period for the options ranges from one year to fouris three years. The exercise prices for the options range from $0.44 to $1.58.that were granted during the three months ended March 31, 2020 and March 31, 2019, are $0.28 and $0.70, respectively. Those options expire up to five years after the date of the 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 and non-employees during the ninethree months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
| Three months ended March 31 | ||||||||
| 2020 | 2019 | |||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| Expected volatility | 102.45 | % | 79 | % | ||||
| Risk-free interest rate | 0.65 | % | 2.47 | % | ||||
| Expected life - in years | 2.44 | 2.44 | ||||||
| 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 and on the OTCQX market, as applicable. |
| 3. | Risk-free interest rate |
| Estimated expected lives |
The Company’s options activity (including options to non-employees) during the nine months ended September 30, 2017 and options outstanding and options exercisable as of December 31, 20162019 and September 30, 2017,March 31, 2020, are summarized in the following table:
| Number of | Weighted average exercise | ||||||||
| options | price per | ||||||||
| outstanding | share | ||||||||
| Outstanding – December 31, 2016 | 1,604,836 | $ | 1.36 | ||||||
| Options granted | 100,000 | 1.58 | |||||||
| Options expired or forfeited | (286,334 | ) | 1.89 | ||||||
| Options exercised | (25,002 | ) | 0.92 | ||||||
| Outstanding – September 30, 2017 | 1,393,500 | $ | 1.27 | ||||||
| Exercisable as of: | |||||||||
| December 31, 2016 | 591,017 | $ | 1.83 | ||||||
| September 30, 2017 | 605,167 | $ | 1.57 | ||||||
| Number of options outstanding | Weighted average exercise price per share | |||||||
| Outstanding – December 31, 2019 | 809,000 | $ | 0.93 | |||||
| Options granted | 204,000 | 0.28 | ||||||
| Options expired or forfeited | (5,000 | ) | 1.68 | |||||
| Outstanding – March 31, 2020 | 1,008,000 | 0.79 | ||||||
| Exercisable as of: | ||||||||
| December 31, 2019 | 505,657 | $ | 1.06 | |||||
| March 31, 2020 | 500,657 | $ | 1.05 | |||||
F-22
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 8 -10 – Equity (cont’d)
| Stock option plans (cont’d) |
The weighted average fair value of options granted during the ninethree months ended September 30, 2017March 31, 2020 and during the ninethree months ended September 30, 2016March 31, 2019 is $0.93$0.11 and $0.41,$0.25, respectively, per option. The aggregate intrinsic value of outstanding options as of September 30, 2017March 31, 2020 and December 31, 20162019 is approximately $465 and $909, respectively.zero. The aggregate intrinsic value of exercisable options as of September 30, 2017March 31, 2020 and December 31, 20162019 is approximately $168 and $166, respectively.zero.
The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of September 30, 2017:March 31, 2020:
| Options outstanding | Options Exercisable | ||||||||||||||||||||||||||
| Number | Weighted | Number | Weighted | ||||||||||||||||||||||||
| outstanding | average | Weighted | Outstanding | average | Weighted | ||||||||||||||||||||||
| Range of | as of | remaining | Average | As of | remaining | Average | |||||||||||||||||||||
| exercise | September 30, | contractual | Exercise | September 30, | contractual | Exercise | |||||||||||||||||||||
| price | 2017 | life (years) | Price | 2017 | life (years) | Price | |||||||||||||||||||||
| $ | 0.44-0.90 | 585,000 | 3.05 | $ | 0.77 | 281,667 | 2.78 | $ | 0.77 | ||||||||||||||||||
| 1.07-1.46 | 420,000 | 3.77 | 1.12 | 50,000 | 0.80 | 1.46 | |||||||||||||||||||||
| 1.58-1.68 | 115,000 | 4.08 | 1.59 | 10,000 | 2.25 | 1.68 | |||||||||||||||||||||
| 2.32-2.36 | 233,500 | 1.59 | 2.35 | 233,500 | 1.59 | 2.35 | |||||||||||||||||||||
| $ | 3.03 | 40,000 | 1.98 | $ | 3.03 | 30,000 | 1.98 | $ | 3.03 | ||||||||||||||||||
| 1,393,500 | 3.08 | 605,167 | 2.11 | ||||||||||||||||||||||||
| Options outstanding | Options Exercisable | |||||||||||||||||||||||
| Number | Weighted | Number | Weighted | |||||||||||||||||||||
| outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||
| as of | remaining | Average | as of | remaining | Average | |||||||||||||||||||
| March 31, | contractual | Exercise | March 31, | contractual | Exercise | |||||||||||||||||||
| Range of exercise price ($) | 2020 | life (years) | Price ($) | 2020 | life (years) | Price ($) | ||||||||||||||||||
| 0.28-0.90 | 537,000 | 3.92 | 0.48 | 110,995 | 1.53 | 0.77 | ||||||||||||||||||
| 1.07-1.68 | 471,000 | 2.18 | 1.14 | 389,662 | 2.08 | 1.13 | ||||||||||||||||||
| 1,008,000 | 3.11 | 500,657 | 1.96 | |||||||||||||||||||||
As of September 30, 2017,March 31, 2020, there was approximately $354$100 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 1.1 year.1.17 years.
During the ninethree months ended September 30, 2017March 31, 2020, and September 30, 2016,March 31, 2019, the Company recorded stock-based compensation expenses in the amount of $238$12 and $174,$46, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”
As of September 30, 2017, there are remaining 40,000 outstandingStock options and warrants with a per share exercise price of $0.95. The warrants expire during 2019.
F-23
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 911 - Operating segments
For the purposes of allocating resources and assessing performance in order to improve profitability, the Company'sCompany’s chief operating decision maker (“CODM”) examines two segments which are the Company'sCompany’s strategic business units: (1) Retail and Mass Transit Ticketing; and (2) Petroleum. In addition to its two reportable segments, certain products for the medical industry and other secure smart card solutions are classified under the Company’s “Other” segment.
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, 2017 | Three months ended March 31, 2020 | |||||||||||||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Other | Consolidated | Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Revenues | $ | 917 | $ | 3,231 | $ | 522 | $ | 4,670 | $ | 3,653 | $ | 798 | $ | 4,451 | ||||||||||||||
| Reportable segment gross profit (*) | 493 | 1,859 | 325 | 2,677 | ||||||||||||||||||||||||
| Reportable segment gross profit * | 2,045 | 323 | 2,368 | |||||||||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||||||
| Depreciation | (199 | ) | (189 | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | (1 | ) | |||||||||||||||||||||||||
| (*) Gross profit for the period | $ | 2,478 | ||||||||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 2,178 | ||||||||||||||||||||||||||
| Three months ended September 30, 2016 | Three months ended March 31, 2019 | |||||||||||||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Other | Consolidated | Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Revenues | $ | 1,056 | $ | 3,891(** | ) | $ | 649 | $ | 5,596 | $ | 2,193 | $ | 820 | $ | 3,013 | |||||||||||||
| Reportable segment gross profit (*) | 638 | 2,238 | 326 | 3,202 | ||||||||||||||||||||||||
| Reportable segment gross profit * | 1,498 | 346 | 1,844 | |||||||||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||||||
| Depreciation | (161 | ) | (200 | ) | ||||||||||||||||||||||||
| Stock-based compensation | (2 | ) | (1 | ) | ||||||||||||||||||||||||
| (*) Gross profit for the period | $ | 3,039 | ||||||||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 1,643 | ||||||||||||||||||||||||||
| * | Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation. |
F-24
On Track Innovations Ltd.
and its 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 - Operating segments (cont’d)12 – Subsequent events
| Nine months ended September 30, 2017 | ||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Other | Consolidated | |||||||||||||
| Revenues | $ | 3,645 | $ | 10,654 | $ | 1,337 | $ | 15,636 | ||||||||
| Reportable segment gross profit (*) | 1,889 | 6,068 | 794 | 8,751 | ||||||||||||
| Reconciliation of reportable segment gross profit to profit for the period | ||||||||||||||||
| Depreciation | (582 | ) | ||||||||||||||
| Stock-based compensation | (1 | ) | ||||||||||||||
| (*) Gross profit for the period | $ | 8,168 | ||||||||||||||
| 1. | In April 2020, the Company’s shareholders approved an increase in the Company’s authorized share capital, by NIS 5,000,000, divided into 50,000,000 ordinary share of NIS 0.1 par value per share, to NIS 10,000,000, divided into 100,000,000 ordinary shares of NIS 0.1 par value per share, see Note 10A. |
| Nine months ended September 30, 2016 | ||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Other | Consolidated | |||||||||||||
| Revenues | $ | 2,996 | $ | 10,029(** | ) | $ | 1,953 | $ | 14,978 | |||||||
| Reportable segment gross profit (*) | 1,836 | 5,568 | 968 | 8,372 | ||||||||||||
| Reconciliation of reportable segment gross profit to profit for the period | ||||||||||||||||
| Depreciation | (559 | ) | ||||||||||||||
| Stock-based compensation | (2 | ) | ||||||||||||||
| (*) Gross profit for the period | $ | 7,811 | ||||||||||||||
| 2. | Regarding the issuance of 6,000,000 ordinary shares for aggregate gross proceed of $1,200 in April 2020, see Note 10A. |
(*) Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.
| 3. | In April 2020 the Company granted an aggregate of 580,000 options to its Chief Executive Officer and to one of its directors. The exercise price of 480,000 options is $0.2 per share and the exercise price of 100,000 options is $0.35 per share. The rest of the terms of those options are similar to the terms of options granted during the three months ended March 31, 2020, as mentioned in Note 10B. |
(**) The revenues from retail and mass transit ticketing segment for the three months and nine months ended September 30, 2016 include revenues derived from a litigation settlement with a perpetual license agreement. Those revenues are presented within revenues from ‘licensing and transaction fees’ in the statements of operations.
| 4. | Regarding a change in the maturity term of a bank loan, see Note 1D. |
F-25
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"“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"“believes,” “intends,” “plans”, "intends", "plans", "expects", "may", "will", "should",“expects,” “may,” “will,” “should,” or "anticipates"“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:
| ● | our expectations regarding the growth of the near-field communication, or NFC, market; |
| ● | any impact of the Corona Virus, or COVID-19, pandemic on our business, including continued decrease in the Mass Transit activity in Poland; |
| ● | the expected development and potential benefits from our existing or future products or our intellectual property, or IP; |
| ● |
| ● | 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 |
| ● | our intention to continue to invest in research and development; |
| ● | our outlook for the coming months; |
| ● | information with respect to any other plans and strategies for our |
| ● | our expectation to close transactions related to our Retail business with potential customers. |
The factors discussed herein, includingand in those risk factors expressed below and 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.
2
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” below and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019 filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
As used in this Quarterly Report, the terms "we"“we”, "us"“us”, "our"“our”, "the Company"“the Company”, and "OTI"“OTI” mean On Track Innovations Ltd. and our subsidiaries, and affiliates, 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 in.herein.
Overview
We are a fintech pioneer and a leading developer of cutting-edge secure cashless payment solutions providing global enterprises with innovative technology for over twothree decades. We currently operate in two main segments: (1) Retail and Mass Transit Ticketing; and (2) Petroleum (following the divesture of our parking business as specified below). In addition to our two reportable segments, certain products for the medical industry and other secure smart card solutions are classified under “Other” in segment analyses appearing in this Quarterly Report.Petroleum.
Our field-proven suite of cashless paymentvision is to strengthen our global presence with innovative solutions is based on an extensiveand provide our customers with the best possible support in superior service and reliable advanced products.
Our IP portfolio includingincludes registered patents and patent applications worldwide. Since our incorporation in 1990, we have built an international reputation for reliability and innovation, deploying a large number ofmany solutions for the unattended retail, mass transit, banking, medicalInternet of Payment Things and the petroleum management industries.
We operate a global network of regional offices, distributors and partners to support various solutions deployed across the globe.
We focus our efforts on our core business of providing innovative cashless payment solutions based, among other things, on our innovative contactless NFC technology. To this end, and in line with our efforts to focus on our core business, in September 2016 we completed the sale of the operations, including our employees, as well as IP directly related to our parking business. We have increased our efforts to further develop existing and new products and solutions, including among others by the introduction of our new products and solutions for the unattended payment market and Internet of Payment Things technology. We have also increased our sales and marketing activities and resources.
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.Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC.
Results of Operations
Discontinued operations. In September 2016December 2018, we completed the sale of certain assets and IP relatedour MediSmart activities (most of which is attributed to our parking business.former “Other” segment) to Smart Applications International Limited. 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 flowsflow 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. 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, 2017,March 31, 2020, compared to the three months ended September 30, 2016March 31, 2019
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. In addition, we generate revenues fromcomponents, licensing and transaction fees and also less significantly, from engineering services, customer services and technical support. During the three months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
Three months ended September 30, | Three months ended March 31, | |||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Sales | $ | 3,445 | $ | 3,463 | $ | 3,396 | $ | 1,722 | ||||||||
| Licensing and transaction fees | $ | 1,225 | $ | 2,133 | $ | 1,055 | $ | 1,291 | ||||||||
| Total revenues | $ | 4,670 | $ | 5,596 | $ | 4,451 | $ | 3,013 | ||||||||
Sales.Sales increased by $1.7 million, or 97%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, remained consistent.March 31, 2019. The increase is mainly attributed to an increase of Retail and Mass Transit Ticketing segment sales in the United States and Russia.
Licensing and transaction feesfees.. Licensing and transaction fees include single and periodic payments for distribution rights for our products.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 decreased by $236,000, or 18%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, decreased by $908,000, or 43%. ThisMarch 31, 2019. The decrease wasis mainly dueattributed to a decrease in licensing of our IP rights to third partiesMass Transit Ticketing sales in the United States (including licenses granted pursuantPolish market as a result of the impact of the COVID-19 pandemic. Such decrease is expected to settlements of legal actions to enforce patent rights).continue for the foreseeable future.
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, 2017March 31, 2020 and September 30, 2016:March 31, 2019:
| Three months ended September 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
| 2017 | $ | 999 | 21 | % | $ | 1,421 | 30 | % | $ | 73 | 2 | % | $ | 2,177 | 47 | % | ||||||||||||||||
| 2016 | $ | 1,081 | 19 | % | $ | 1,653 | 30 | % | $ | 289 | 5 | % | $ | 2,573 | 46 | % | ||||||||||||||||
| Three months ended March 31, | Americas | Europe | Africa | APAC | ||||||||||||||||||||||||||||
| 2020 | $ | 1,755 | 39 | % | $ | 1,966 | 44 | % | $ | 517 | 12 | % | $ | 213 | 5 | % | ||||||||||||||||
| 2019 | $ | 641 | 21 | % | $ | 1,646 | 55 | % | $ | 573 | 19 | % | $ | 153 | 5 | % | ||||||||||||||||
Our revenues from sales in Africa decreasedAmericas increased by $82,000,$1.1 million, or 8%174%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016,March 31, 2019, mainly due to a decreasean increase in sales of Petroleum products.readers to the U.S. market.
Our revenues from sales in Europe decreasedincreased by $232,000,$320,000, or 14%19%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016,March 31, 2019, mainly due to an increase in sales of readers to the Russian and Turkish markets, partially offset by a decrease in sales of Retail and Mass Transit Ticketing segment products.sales in the Polish market as a result of the impact of COVID-19.
Our revenues from sales in APAC decreased by $216,000, or 75%,Africa in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, mainly due to a decrease in sales of access control products.March 31, 2019, remained consistent.
Our revenues from sales in Americas decreasedthe Asia-Pacific region, or APAC, increased by $396,000,$60,000, or 15%39%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016,March 31, 2019, mainly due to a decrease in licensing of our intellectual property rights to third parties in the United States (including licenses granted pursuant to settlements of legal actions to enforce patent rights) partially offset by an increase in sales of readers in the United States.Petroleum segment sales.
Our revenues derived from outside the United States which are primarily received in currencies other than the U.S. dollar willand accordingly have a varying impact upon our total revenues as a result of fluctuations in such currencies’ exchange rates versus the U.S. dollar.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, 2017March 31, 2020 and September 30, 2016:March 31, 2019:
| Three months ended September 30, | Petroleum | Retail and Mass Transit Ticketing | Other | |||||||||||||||||||||
| 2017 | $ | 917 | 20 | % | $ | 3,231 | 69 | % | $ | 522 | 11 | % | ||||||||||||
| 2016 | $ | 1,056 | 19 | % | $ | 3,891 | 69 | % | $ | 649 | 12 | % | ||||||||||||
Our revenues in the three months ended September 30, 2017, from Petroleum decreased by $139,000, or 13%, compared to the three months ended September 30, 2016, mainly due to a decrease in sales of Petroleum products in Africa.
| Three months ended March 31, | Retail and Mass Transit Ticketing | Petroleum | ||||||||||||||
| 2020 | $ | 3,653 | 82 | % | $ | 798 | 18 | % | ||||||||
| 2019 | $ | 2,193 | 73 | % | $ | 820 | 27 | % | ||||||||
Our revenues from Retail and Mass Transit Ticketing in the three months ended September 30, 2017, decreasedMarch 31, 2020 increased by $660,000,$1.5 million, or 17%67%, compared to the three months ended September 30, 2016,March 31, 2019, mainly dueattributed to a decrease in licensing of our intellectual property rights to third parties in the United States (including licenses granted pursuant to settlements of legal actions to enforce patent rights) partially offset by an increase in sales of readers in the United States.States and Russian market.
Our revenues from Petroleum in the three months ended September 30, 2017, from our Other segment decreased by $127,000, or 20%,March 31, 2019, compared to the three months ended September 30, 2016, mainly due to a decrease in sales of access control products in APAC partially offset by an increase in sales of our MediSmart products in Africa.March 31, 2019, remained consistent.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, infor the three months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, were as follows (in(dollar amounts in thousands):
| Cost of revenues | Three months ended September 30, | Three months ended March 31, | ||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Cost of sales | $ | 2,192 | $ | 2,557 | $ | 2,273 | $ | 1,370 | ||||||||
| Gross profit | $ | 2,478 | $ | 3,039 | $ | 2,178 | $ | 1,643 | ||||||||
| Gross margin percentage | 53% | 54% | 49 | % | 55 | % | ||||||||||
Cost of salessales.. 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 decreaseincrease of $365,000,$903,000, or 14%66%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016,March 31, 2019, resulted primarily from a decreasethe increase in revenues.revenues mainly attributed to the increase in Retail sales in the United States and in Russia.
Gross margin. The decrease in gross margin percentage in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016,March 31, 2019, is mainly attributed to a change in our revenue mix and attributed to the decrease in sales.Mass Transit Ticketing sales in the Polish market as a result of the impact of COVID-19.
5
Operating expenses
Our operating expenses infor the three months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, were as follows (in thousands):
| Operating expenses | Three months ended September 30, | Three months ended March 31, | ||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Research and development | $ | 823 | $ | 604 | $ | 898 | $ | 871 | ||||||||
| Selling and marketing | $ | 1,332 | $ | 1,300 | $ | 1,162 | $ | 1,285 | ||||||||
| General and administrative | $ | 758 | $ | 787 | $ | 957 | $ | 965 | ||||||||
| Other expenses | $ | - | $ | 83 | ||||||||||||
| Total operating expenses | $ | 2,913 | $ | 2,774 | $ | 3,017 | $ | 3,121 | ||||||||
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 $219,000, or 36%,research and development expenses in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, is primarily attributed to an increase in the number of research and development employees.March 31, 2019, remained consistent.
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. Our selling and marketing expenses,The decrease of $123,000, or 10%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, remained consistent.March 31, 2019, is primarily attributed to a decrease in marketing and advertising expenses and 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 lawyerslegal and accountants)accounting), office expenses, insurance and patent maintenance expenses which consist of professional advisors of our patents and other IP. The general and administrative expenses and provision for doubtful accounts. The decrease of $29,000, or 4%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, is primarily attributed toMarch 31, 2019, remained consistent.
Financing income from our lawsuit against Harel Insurance Company Ltd.(expenses), or Harel,net
Our financing income (expenses), net, for damages incurred by us due to flooding in a subcontractor’s manufacturing site, partially offset by an increase in salaries and employees’ benefit and an increase in professional expenses.
Other expenses. Our other expenses in the three months ended September 30, 2016 consist a loss of $83 related to the sale of our headquarters building in Rosh Pina, Israel to a third party.
Financing expenses, net
Our financing expenses, net, in the three months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, were as follows (in thousands):
| Three months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Financing expenses, net | $ | (126 | ) | $ | (30 | ) | ||
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Financing income (expenses), net | $ | 168 | $ | (69 | ) | |||
Financing expensesincome (expenses), net consist primarily of financing expense related to interest payable on bank loans and bank commissions, and foreign exchange losses. Financingpartially offset by financing income consists primarily of foreign exchange gains andrelated to interest earned on investments in short-term deposits.deposits and foreign exchange differentials. The increasechange in financing expenses,income, net, of $237,000 in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, of $96,000, or 320%,March 31, 2019, is mainly due to an exchange rate differentials.differential.
6
Net (loss) incomeloss from continuing operations
Our net (loss) incomeloss from continuing operations for the three months ended March 31, 2020 and March 31, 2019, was as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net loss from continuing operations | $ | (658 | ) | $ | (1,552 | ) | ||
The decrease in our net lossfrom continuing operations of $894,000, or 58%, in the three months ended September 30, 2017 and September 30, 2016, was as follows (in thousands):
Three months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net (loss) income from continuing operations | $ | (573 | ) | $ | 207 | |||
The change of $780,000, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016March 31, 2019, is mainly due to a decreasean increase in our sales, a decrease in our gross profit, an increase in our operating expenses and an increasea change in the financing expenses,income (expenses), net, as described above.
Net income (loss)loss from discontinued operations
Our net income (loss)loss from discontinued operations infor the three months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, was as follows (in thousands):
Three months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net income (loss) from discontinued operations | $ | 1,441 | $ | (279 | ) | |||
In September 2016, we completed the sale of certain assets and IP related to our parking business. In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division.
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net loss from discontinued operations | $ | (11 | ) | $ | (193 | ) | ||
The resultsdecrease in our net loss from thesediscontinued operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations.
The increasedecrease in the net profitloss from discontinued operations of $1.7 million$182,000, or 94% in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016,March 31, 2019, is mainly attributedto $1.6 million net, recovered by us pursuant to the August 23, 2017 judgment of the Israeli Central District Court in a lawsuit against Harel Insurance Company Ltd., or Harel for damages incurred by us due to floodinga decrease in a subcontractor’s manufacturing site. Appeal of this judgment by Harel is pending before the Israeli Supreme Court. Based on the advice of counsel, the Company currently believes that there are sufficient grounds on whichexpenses relating to uphold the District Court’s ruling and, as such, Harel’s appeal will be denied.legal proceedings.
Net income (loss)loss
Our net income (loss) inloss for the three months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, was as follows (in thousands):
Three months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net income (loss) | $ | 868 | $ | (72 | ) | |||
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net loss | $ | (669 | ) | $ | (1,745 | ) | ||
The increasedecrease in net income (loss)loss of $940,000$1.1 million, or 62%, in the three months ended September 30, 2017,March 31, 2020, compared to the three months ended September 30, 2016, is due to an increase in net income from discontinued operations which was offset by a decrease in our revenues and gross profit, an increase in our operating expenses and an increase in financing expenses, net as described above.
Nine months ended September 30, 2017, compared to the nine months ended September 30, 2016
Sources of Revenue
During the nine months ended September 30, 2017 and September 30, 2016, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Sales | $ | 11,871 | $ | 10,409 | ||||
| Licensing and transaction fees | $ | 3,765 | $ | 4,569 | ||||
| Total revenues | $ | 15,636 | $ | 14,978 | ||||
Sales. Sales increased by $1.5 million, or 14%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase is mainly attributed to an increase in Retail and Mass Transit Ticketing segment sales in Japan, to an increase in Petroleum segment sales in Africa and to an increase in sales of our otiMetry solution in Europe partially offset by a decrease in sales of readers to the U.S. market and to a decrease in our Other segment sales.
Licensing and transaction fees. Our licensing and transaction fees in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, decreased by $804,000, or 18%. This was mainly due to a decrease in licensing of our intellectual property rights to third parties in the United States (including licenses granted pursuant to settlements of legal actions to enforce patent rights).
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, 2017 and September 30, 2016:
| Nine months ended September 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
| 2017 | $ | 3,352 | 21 | % | $ | 5,355 | 34 | % | $ | 1,807 | 12 | % | $ | 5,122 | 33 | % | ||||||||||||||||
| 2016 | $ | 3,048 | 20 | % | $ | 4,583 | 31 | % | $ | 522 | 3 | % | $ | 6,825 | 46 | % | ||||||||||||||||
Our revenues from sales in Africa increased by $304,000, or 10%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, mainly due to an increase in our sales in our Petroleum segment partially offset by a decrease in sales of our MediSmart products.
Our revenues from sales in Europe increased by $772,000, or 17%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, mainly due to an increase in sales in our Retail and Mass Transit Ticketing segment and to an increase in our otiMetry solution in the European market.
Our revenues from sales in APAC increased by $1.3 million, or 246%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, mainly due to an increase in our Uno Plus and GoBox products in Japan.
Our revenues from sales in Americas decreased by $1.7 million, or 25%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, mainly due to a decrease in sales of readers and licensing of our intellectual property rights to third parties in the United States (including licenses granted pursuant to settlements of legal actions to enforce patent rights).
Our revenues derived from outside the United States, which are primarily received in currencies other than the U.S. dollar, will have a varying impact upon our total revenues, as a result of fluctuations in such currencies’ exchange rates versus the U.S. dollar.
The following table sets forth our revenues (in thousands) and as a percentage of revenues by segments, during the nine months ended September 30, 2017 and September 30, 2016:
| Nine months ended September 30, | Petroleum | Retail and Mass Transit Ticketing | Other | |||||||||||||||||||||
| 2017 | $ | 3,645 | 23 | % | $ | 10,654 | 68 | % | $ | 1,337 | 9 | % | ||||||||||||
| 2016 | $ | 2,996 | 20 | % | $ | 10,029 | 67 | % | $ | 1,953 | 13 | % | ||||||||||||
Our revenues in the nine months ended September 30, 2017, from Petroleum increased by $649,000, or 22%, compared to the nine months ended September 30, 2016 due to an increase in products sales in Africa.
Our revenues from Retail and Mass Transit Ticketing in the nine months ended September 30, 2017, increased by $625,000, or 6%, compared to the nine months ended September 30, 2016, mainly due to an increase in sales in the Japanese market and an increase in readers and otiMetry solution sales in Europe partially offset by a decrease in sales of readers in the United States.
Our revenues in the nine months ended September 30, 2017, from our Other segment decreased by $616,000, or 32%, compared to the nine months ended September 30, 2016, mainly due to a decrease in sales of MediSmart products in East Africa.
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, 2017 and September 30, 2016, were as follows (in thousands):
| Cost of revenues | Nine months ended September 30, | |||||||
| 2017 | 2016 | |||||||
| Cost of sales | $ | 7,468 | $ | 7,167 | ||||
| Gross profit | $ | 8,168 | $ | 7,811 | ||||
| Gross margin percentage | 52% | 52% | ||||||
Cost of sales. The increase of $301,000, or 4%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, resulted primarily from an increase in revenues.
Gross margin.Our gross margin, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, remained consistent.
Operating expenses
Our operating expenses in the nine months ended September 30, 2017 and September 30, 2016, were as follows (in thousands):
| Operating expenses | Nine months ended September 30, | |||||||
| 2017 | 2016 | |||||||
| Research and development | $ | 2,414 | $ | 2,072 | ||||
| Selling and marketing | $ | 4,166 | $ | 3,974 | ||||
| General and administrative | $ | 2,553 | $ | 2,613 | ||||
| Other expenses | $ | - | $ | 83 | ||||
| Total operating expenses | $ | 9,133 | $ | 8,742 | ||||
Research and development. The increase of $342,000, or 17%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, is primarily attributed to an increase in the number of research and development employees and to an increase in subcontractor expenses.
Selling and marketing. The increase of $192,000, or 5%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, is primarily attributed to an increase in employment expenses of selling and marketing employees and to an increase in marketing and advertising expenses.
General and administrative. Our general and administrative expenses, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, remained consistent.
Other expenses. Our other expenses in the nine months ended September 30, 2016 consist a loss of $83 related to the sale of our headquarters building in Rosh Pina, Israel to a third party.
Financing expenses, net
Our financing expenses, net, in the nine months ended September 30, 2017 and September 30, 2016, were as follows (in thousands):
| Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Financing expenses, net | $ | (236 | ) | $ | (185 | ) | ||
The increase of financing expenses, net in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, of $51,000, or 28%, is mainly due to exchange rate differentials offset by an increase in interest earned on investments in short-term deposits, a decrease in interest expenses on bank loans and a decrease in bank commissions.
Net loss from continuing operations
Our net lossfrom continuing operations in the nine months ended September 30, 2017 and September 30, 2016, was as follows (in thousands):
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net loss from continuing operations | $ | (1,269 | ) | $ | (1,176 | ) | ||
The increase in net loss from continuing operations of $93,000, or 8%, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016,March 31, 2019, is primarily due to an increase in our sales, a decrease in our operating expenses, and an increase in financing expenses, net, offset by an increase in our revenues and gross profit as described above.
Net income from discontinued operations
Our net income from discontinued operationsa change in the nine months ended September 30, 2017 and September 30, 2016, was as follows (in thousands):
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net income from discontinued operations | $ | 1,365 | $ | 1,525 | ||||
Netfinancing income from discontinued operations decreased by $160,000, or 10%. Net income from discontinued operations in the nine months ended September 30, 2016, included a $2.1 million settlement fee paid to us in May 2016, in connection with a litigation with SuperCom Ltd. relating to the sale of our SmartID division, partially offset by a loss from discontinued operations activity related to the sale of certain assets and IP of our previous parking business. Net income from discontinued operations in the nine months ended September 30, 2017, included a $1.6 million net, recovered by us pursuant to the August 23, 2017 judgment of the Israeli Central District Court in a lawsuit against Harel for damages incurred by us due to flooding in a subcontractor’s manufacturing site. Appeal of this judgment by Harel is pending before the Israeli Supreme Court (the Company currently believes that there are sufficient grounds on which to uphold the District Court’s ruling and, as such, Harel’s appeal will be denied)(expenses), partially offset by a loss from decreasing court bonds related to Harel.
Net income
Our net income in the nine months ended September 30, 2017 and September 30, 2016, was as follows (in thousands):
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net income | $ | 96 | $ | 349 | ||||
The decrease in net income of $253,000, in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, is primarily due to an increase in operating expenses, an increase in financing expenses net, and a decrease in net profitloss from discontinued operations, partially offset by an increase in revenues and gross profit, as described above.
7
Liquidity and Capital Resources
Our principal sources of liquidity since our inception have been revenues, proceeds from sales of equity securities, borrowings from banks, cash from the exercise of options and warrants and proceeds from divestituresthe divestiture of partspart of our businesses. WeAs of March 31, 2020, we had cash, cash equivalents and short-term investments representing bank deposits of $8.7$3.4 million as of September 30, 2017 (of which an amount of $1.5 million$105,000 has been pledged to secure performance guarantees granted to third parties and guarantees to secure customer advances, loans and credit lines received from a bank), and $11.5 million as of December 31, 2016 (of which an amount of $1.5 million had then been pledged to secure performance guarantees granted to third parties and guarantees to secure customer advances, loans and credit lines received from a bank)securities for certain items). We believe that we have sufficient capital resources to fund our operations infor at least the next 12 months. We adhere
On December 23, 2019, we entered into a share purchase agreement, or the Agreement, with Jerry L Ivy, Jr. Descendants Trust, or Ivy, and two other investors who are members of the Company’s Board of Directors, or collectively together with Ivy, the Investors. The Agreement relates to a private placement of an investment policy which is intendedaggregate of up to enable12,500,000 of our ordinary shares for aggregate gross proceeds to us of up to $2,500,000.
As part of this Agreement, in December 2019 and January 2020, we issued 5,460,000 and 1,040,000 ordinary shares, respectively, for aggregate gross proceed of $1,092,000 and $208,000 respectively. Under the Companyterm of the Agreement and following the issuance of those shares, we appointed one representative to avoid being classifiedour Board of Directors, designated by Ivy. Also, pursuant to the Agreement, Ivy has a right to purchase any future equity securities offered by us, except with respect to certain exempt issuances as a “passive foreign investment company,” or PFIC, under U.S. law. That said, we cannot provide complete assurance that PFIC status will be avoidedset forth in the future. In addition, our investment policy requires investment in high-quality investment-grade securities. As of September 30, 2017, our long-term bank loans are denominated in the following currencies: Polish Zloty ($856,000, with maturity dates ranging from 2017 through 2019) and South African Rand ($597,000, with maturity dates ranging from 2017 through 2023). As of September 30, 2017, these loans bear interest at rates ranging from 3.2%-10.5% per annum.Agreement.
Our compositionThe issuance of long-term loans asthe remaining 6,000,000 ordinary shares, or the Subsequent Closing, for aggregate gross proceeds of September 30, 2017, was as follows (in thousands):$1,200,000 took place in April 2020, following the approval by our 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 our Board of Directors.
| September 30, 2017 | ||||
| Long-term loans | $ | 1,453 | ||
| Less - current maturities | 564 | |||
| $ | 889 | |||
In addition, pursuant to the terms of the Agreement, on May 5, 2020, after the consummation of the Subsequent Closing, our Board of Directors 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.
In connection with the outbreak of the COVID-19 pandemic, we have taken steps to protect our workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include work from home where possible, minimizing face-to-face meetings and utilizing video conference as much as possible, social distancing at facilities and elimination of all international travel. We continue to comply with all local health directives.
As of the reporting date, the main impact of the COVID-19 pandemic, as we predicted at the early stage, is a decrease in our revenues derived from Mass Transit activity in the Polish market. The decrease of approximately $0.3 million in this operation, that was relatively stable during the year preceding the COVID-19 outbreak, started mainly in March 2020 and is expected to continue for the foreseeable future. As a response to this effect, we take steps to reduce some costs that are not essential under the current circumstances.
Another impact of COVID-19 has been on product delivery, where components’ procurement lead time is longer and a shortage in component has grown as the duration of the COVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortage in component may continue or get worse. Therefore, we maintain a comprehensive network of world-wide suppliers.
As for our Retail activity, we have seen a higher interest from a growing number of potential customers and partners as they forecasted that the need for our products will grow, yet execution of closings is still slow due to the current business environment.
It is difficult to predict what other impacts the COVID-19 pandemic may have on us.
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Our compositionBased on Polish government regulations introduced in relation to the COVID-19 pandemic, ASEC S.A. (Spolka Akcyjna), our Polish subsidiary, or ASEC, received the consent of short-term loans,PKO Bank Polski, a Polish bank, creditor the Lender, to postpone the maturity of a secured $2,000,000 loan, as loaned to it in May 2019, by six months. Accordingly, the loan will mature on November 22, 2020 instead of May 23, 2020, as previously provided in the loan agreement. The loan will be payable in full on maturity (with option of early repayment by ASEC) and current maturitiesthe interest is paid on a monthly basis. The loan bears interest at an annual interest rate based on 1-month LIBOR plus a margin of long-term loans as1.8%, or currently approximately 2.8% in total. The loan agreement includes customary events of September 30, 2017, were as follows (in thousands):default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the loan agreement, etc. If an event of default occurs, the Lender may reduce the amount of the loan, demand an additional security or terminate the loan agreement.
| September 30, 2017 | ||||||||
| Interest rate | ||||||||
| In U.S. dollars | 4.21 | % | $ | 1,910 | ||||
| In Polish Zloty | 3.63 | % | 1,082 | |||||
| In NIS | 3.60 | % | 833 | |||||
3,825 | ||||||||
| Current maturities of long-term loans | 564 | |||||||
| $ | 4,389 | |||||||
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. Our short termshort-term deposits in the amount of $1.5 million$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, 2017,March 31, 2020, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in the sum of $352,000.$376,000. The expiration dates of the guarantees range from October 2017May 2020 to June 2019.September 2021.
For the three months ended March 31, 2020, we had a negative cash flow from continuing operations of $1.1 million.
9
Operating activities related to continuing operations
For the ninethree months ended September 30, 2017,March 31, 2020, net cash used in continuing operating activities was $2,440,000,$1.1 million primarily due to a $1.3$917,000 decrease in trade payables, a $697,000 increase in trade receivables, a $658,000 net loss from continuing operations, a $156,000 decrease in accrued interest and linkage differences, a $15,000 decrease in deferred tax liability and a $8,000 decrease in accrued severance pay, partially offset by a $584,000 increase in other current liabilities, $307,000 of depreciation and amortization, a $274,000 decrease in inventory, a $142,000 decrease in other receivables and prepaid expenses and $12,000 of expenses due to stock based compensation issued to employees and others.
For the three months ended March 31, 2019, net cash provided by continuing operating activities was $186,000 primarily due to a $1.6 million net loss from continuing operations, a $777,000$1.3 million decrease in other current liabilities,trade receivables, a $710,000$457,000 increase in inventory, a $611,000 decrease$423,000 increase in trade payables, $320,000 of depreciation and amortization, a $435,000 increase$264,000 decrease in other receivables and prepaid expenses, a $41,000$186,000 decrease in other current liabilities, a $46,000 expense due to stock based compensation issued to employees and others, a $29,000 increase in accrued severance pay, a $12,000 decrease in accrued interest and linkage differences, a $9,000$10,000 decrease in deferred tax liability and a $2,000 gain on sale of property and equipment, partially offset by depreciation expenses of $878,000, a $238,000 expense due to stock-based compensation issued to employees, a $187,000 decrease in trade receivables, a $72,000 increase in accrued severance pay and a $37,000 deferred tax expense.equipment.
For the nine months ended September 30, 2016, net cash used in continuing operating activity was $611,000, primarily due to a $1.2 million net loss from continuing operations, a $1.4 million increase in trade receivables, a $408,000 decrease in other current liabilities, a $152,000 decrease in accrued severance pay and a $16,000 increase in other receivables and prepaid expenses, partially offset by a $1 million increase in trade payables, depreciation expenses of $911,000, a $246,000 decrease in inventory, a $174,000 expense due to stock-based compensation issued to employees, a $83,000 loss on sale of property and equipment, a $60,000 deferred tax expense and a $19,000 accrued interest expense.
Operating activities related to discontinued operations
For the ninethree months ended September 30, 2017,March 31, 2020, net cash used in discontinued operating activities was $86,000,$334,000, mainly related to the SmartID division and previous parking business.expenses derived from legal proceedings with Harel Insurance Company Ltd.
For the ninethree months ended September 30, 2016,March 31, 2019, net cash used in discontinued operating activities was $183,000,$1.2 million, mainly related to ourthe dispute regarding Merwell Inc. in connection with the SmartID division and previous parking business.division.
Investing and financing activities related to continuing operations
For the ninethree months ended September 30, 2017,March 31, 2020, net cash provided by continuing investing activities was $2.6$1.3 million, mainly due to a $2,917,000 proceedschange of $1.5 million in short-term investments, a $44,000net, partially offset by $168,000 of purchases of long-lived assets.
For the three months ended March 31, 2019, net cash used in continuing investing activities was $137,000, mainly due to $163,000 of purchases of long-lived assets, partially offset by $10,000 in proceeds from restricted depositsdeposit for employee benefits, and a $14,000 in proceeds from the sale of property and equipment partially offset by a $185,000 investment in capitalized product costs and a $160,000 purchase of property and equipment.
For the nine months ended September 30, 2016, net cash provided by continuing investing activities was $1.1 million, mainly due to a $1.8 million$10,000 in proceeds from the sale of property and equipment and a $142,000change of $6,000 in proceeds from restricted deposits for employee benefits, partially offset by a $502,000 purchase of short-term investments, a $185,000 purchase of property and equipment and a $139,000 investment in capitalized product costs.
For the nine months ended September 30, 2017, net cash used in continuing financing activities was $516,000, mainly due to a repayment of $469,000 of long-term bank loans and a $72,000 decrease in short-term bank credit, partially offset by proceeds of $25,000 from the exercise of options.net.
For the ninethree months ended September 30, 2016,March 31, 2020, net cash used inprovided by continuing financing activities was $1 million,$355,000, mainly due to a repayment$200,000 proceeds from issuance of $1.4 millionshares, net of long-term bank loans, partially offset byissuance costs, a $287,000$160,000 increase in short-term bank credit, proceedsnet, partially offset by a $5,000 repayment of $37,000 fromlong-term loans.
For the exercisethree months ended March 31, 2019, net cash provided by continuing financing activities was $253,000, mainly due to a $372,000 increase in short-term bank credit, net, partially offset by a $119,000 repayment of options and warrants and proceeds of $27,000 from long-term bank loans.
Investing and financing activities related to discontinued operations
We had no cash flows provided by or used in discontinued investing activities in the nine months ended September 30, 2017.
For the nine months ended September 30, 2016, net cash provided by discontinued investing activities was $2.2 million, due to contingent consideration received related to the Smart ID division divestiture and consideration derived from the divestiture of our parking business.
We had no cash flows provided by or used in discontinued financing activities in the ninethree months ended September 30, 2017March 31, 2020 and September 30, 2016.March 31, 2019.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
10
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures -We maintain a system ofOur management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures that(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 for the purposes of ensuringto ensure that information required to be disclosed in our SECthe reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms of the SEC and that such information is accumulated and communicatedwas made known to our management, including our Chief Executive Officer, or CEO and our Chief Financial Officer, or CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we carried out an evaluation,disclosure. We evaluated these disclosure controls and procedures under the supervision and with the participation of our CEO and our CFO as of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended.March 31, 2020. Based onupon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective.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 third quarter of fiscal 2017ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
11
On September 2, 2012, we filed an insurance lawsuit in the Israeli Central District Court against Harel Insurance Company Ltd., or Harel, for damages incurred by us due to flooding in our subcontractor’s (Smartrac) manufacturing site in Thailand in 2011, in the amount of approximately $11 million. This caused disruptions to our supply chain and specifically affected our ability to deliver products to our customers. On August 23, 2017, the District Court in Israel issued judgment in our favor in the amount of approximately $2.3 million (including $0.7 million specifically set for legal fees, etc.) for insurance coverage for damages incurred in connection with flooding in Thailand. Harel submitted its appeal of the judgment to the Israeli Supreme Court as well as a request for stay of judgment. On October 30, 2017, the Court denied the requested stay. Following the denial of Harel’s request, a payment of approximately $1.6 million was received. On January 26, 2020, a hearing in the Israeli Supreme Court took place in front of three judges. Further to discussions held during the hearing, the judges made the parties an offer by way of a settlement, pursuant to which the Company shall return to Harel a sum of approximately $553,000, in three subsequent monthly installments commencing on February 26, 2020. Based on the Supreme Court’s recommendation and the advice of the Company’s legal counsel, the Company agreed to the suggested offer which was also approved by Harel. As of May 12, 2020, we paid all the settlement amount.
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. The arbitration decision had been appealed by SuperCom 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 5,080,000 (approximately $1,370,000). Based on the Company’s prior 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. Since SuperCom failed to pay us the amounts due, in February 2019, we 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.
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, and there might be additional amounts to be claimed in the future, as additional information might be found from time to time. On March 4, 2020, we submitted a response to this complementary claim, rejecting Merwell’s claims. As previously reportedmentioned above, we are conducting in parallel a separate arbitration process against SuperCom in that matter, as we deem SuperCom to be liable for all the costs and liabilities arising out of this claim.
Our business faces many risks, a number of which are described under the caption “Risk Factors” in our Annual Report on Form 10-K filed withfor the SEC on March 28, 2017, on March 1, 2017, USA Technologies Inc.,fiscal year ended December 31, 2019. Other than as set forth below, there have been no material changes from the risk factors previously disclosed in such Annual Report. The risks described in such Annual Report and below may not be the only risks we face. Other risks of which we are not yet aware, or USAT, filed a claim against usthat we currently believe are not material, may also materially and adversely impact our U.S. subsidiary, OTI America Inc.,business operations or OTI America,financial results. If any of the events or circumstances described in the U.S. District Court, Eastern District of Pennsylvania, hereafter referred to as the USAT Claim. The USAT Claim asserted, among other things, that products sold by us to USAT’s manufacturing subcontractor, Masterwork Electronics, Inc., or Masterwork, failed to conform to certain promised specifications. USAT sought payment of $4,912,600 plus interest and costs, comprised of $728,800 to cover payment for alternative products, and $4,183,800 to cover costs of replacing the allegedly non-conforming products already installed. As also previously reportedrisk factors contained in our Annual Report on Form 10-K filedfor the fiscal year ended December 31, 2019 or described below occurs, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and below, and the information contained under the caption “Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.
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We face risks resulting from the recent outbreak of the COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.
Our operations and business could be materially adversely affected by the recent outbreak of COVID-19. Our revenues from Mass Transit activity in the Polish market decreased during the first quarter of 2020 and are expected to continue to decrease in the foreseeable future. In addition, the execution of transactions related to our Retail activity is slow due to COVID-19 and there is no assurance that we will close any of the potential transactions with customers and partners. Further, another impact of COVID-19 is on product delivery, where components’ procurement lead time is longer and a shortage in components has grown as the SECduration of the COVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortages in component may continue or get worse. Although , we maintain a comprehensive network of world-wide suppliers to handle such delays in delivery, we may still suffer delays. Simultaneously, we are attempting to comply with rapidly changing restrictions, such as travel restrictions, curfews and others. In particular, following recommendations from the Israeli Ministry of Health and the Ministry of Finance, on March 28, 2017, on March 3, 2017, we filed a claim against Masterwork16, 2020, the Israeli prime minister announced restrictions under which businesses in the U.S. District Court forprivate sector must reduce their onsite workforce. Currently travel to and from work is still permitted; however, the Northern Districtauthorities may place additional, more restrictive measures on businesses and individuals. Though we may still operate under such regulations, any additional actions taken by the Israeli government could further limit that ability, which may have a material adverse effect on our operations and financial results. A significant reduction in our workforce and our compliance with instructions imposed by Israeli authorities may harm our ability to continue operating our business and materially and adversely affect our operations and financial condition. Further, we cannot assure you that we will be designated an “essential business”, as defined under regulatory instructions, and moreover, we cannot foresee whether the Israeli authorities will impose further restrictive instructions, which if implemented may lead to significant changes.
Authorities around the world have and may continue implementing similar restrictions on business and individuals in their jurisdictions. We are still assessing our business operations and system supports and the impact COVID-19 may have on our results and financial condition. To date, we have taken action to reduce our operating expenses in the short term, but there can be no assurance that this analysis or remedial measures will enable us to avoid part or all of California, hereafter referred to asany impact from the OTI Claim. We sought paymentspread of $2,518,000 plus interest and costs as a result of Masterwork’s refusal to performCOVID-19 or its obligations in connection with a purchase order supplied by Masterwork to us, basedconsequences.
As we previously reported, on Masterwork’s allegations that its customer, USAT, had apparently claimed that the products are not conforming. On July 20, 2017, the OTI Claim was transferred to the Eastern District of Pennsylvania and on August 23, 2017, the USAT Claim and OTI Claim were consolidated into a single action. On November 1, 2017, all parties to these proceedingsMay 24, 2019, ASEC entered into a settlementloan agreement resolving their disputes and have, accordingly, dismissed all litigationwith the Lender. On the same day, the Lender loaned to ASEC the full amount of the loan, $2,000,000, secured by certain assets of ASEC.
Based on Polish government regulations introduced in relation to the COVID-19 pandemic, on May 11, 2020, ASEC entered into an addendum to the loan agreement with the Lender, pursuant to which the Lender agreed to postpone the maturity of the secured $2,000,000 loan, by six months. Accordingly, pursuant to such addendum, the loan will mature on November 1, 2017.22, 2020, instead of May 23, 2020, as previously provided in the loan agreement. The loan will be payable in full on maturity (with option of early repayment by ASEC) and the interest is paid on a monthly basis. The loan bears interest at an annual interest rate based on 1-month LIBOR plus a margin of 1.8%, or currently approximately 2.8% in total. 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 loan agreement, etc. If an event of default occurs, the Lender may reduce the amount of the loan, demand an additional security or terminate the loan agreement.
On October 3, 2013, a financial claim was filed against us and our then-subsidiary, Parx France (referred to in this paragraph, collectively, as the Defendants), in the Commercial Court of Paris, France. The sum of the claim is €1,500,000 (approximately $1,773,000), 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 Paris Commercial Court issued its ruling in this matter dismissing all claims against us but ordered Parx France to pay the plaintiff €50,000 (plus interest) in damages plus another approximately €5,000 in other fees and penalties.
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| * | Filed herewith. |
* Filed herewith.
** Furnished herewith.
| ** | Furnished herewith. |
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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/ Yehuda Holtzman | |||
| Yehuda Holtzman, Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| Dated: May 12,2020 | ||||
| By: | /s/ | |||
| Assaf Cohen, Chief Financial Officer | ||||
| (Principal Financial and Accounting Officer) | ||||
| Dated: May 12, 2020 | ||||
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