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 JuneSeptember 30, 2021
☐ 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.) |
| Hatnufa 5, Yokneam Industrial Zone | 2069200 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: + 972-4-6868000
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 72,789,893 Ordinary Shares outstanding as of AugustNovember 9, 2021.
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 | |||
| Part II - Other Information | ||||
| Item 1A. | Risk Factors | 14 | ||
| Item 6. | Exhibits | 15 | ||
| Signatures | ||||
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of JuneSeptember 30, 2021
(Unaudited)
1
On Track Innovations Ltd.
and its Subsidiaries
Interim Condensed Consolidated
Financial Statements
As of JuneSeptember 30, 2021
(Unaudited)
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Financial Statements as of June 30, 2021
| Interim Unaudited Condensed Consolidated Financial Statements as of September 30, 2021 |
F-1
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
| Interim Unaudited Condensed Consolidated Balance Sheets |
US dollars in thousands except share and per share data
| June 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 959 | $ | 1,377 | $ | 1,253 | $ | 1,377 | ||||||||
| Short-term investments | 1,605 | 105 | - | 105 | ||||||||||||
| Trade receivables (net of allowance for doubtful accounts of $609 and $620 as of June 30, 2021 and December 31, 2020, respectively) | 2,139 | 1,148 | ||||||||||||||
| Trade receivables (net of allowance for doubtful accounts of $610 and $620 as of September 30, 2021 and December 31, 2020, respectively) | 3,839 | 1,148 | ||||||||||||||
| Other receivables and prepaid expenses | 2,712 | 695 | 1,142 | 695 | ||||||||||||
| Inventories | 2,742 | 2,479 | 3,223 | 2,479 | ||||||||||||
| Assets from discontinued operations - held for sale | - | 6,358 | - | 6,358 | ||||||||||||
| Total current assets | 10,157 | 12,162 | 9,457 | 12,162 | ||||||||||||
| Non-current assets | ||||||||||||||||
| Long term restricted deposit for employee benefits | 504 | 511 | ||||||||||||||
| Restricted bank deposit | 105 | - | ||||||||||||||
| Long-term restricted deposit for employee benefits | 509 | 511 | ||||||||||||||
| Severance pay deposits | 406 | 411 | 410 | 411 | ||||||||||||
| Property, plant and equipment, net | 705 | 752 | 702 | 752 | ||||||||||||
| Intangible assets, net | 189 | 247 | 171 | 247 | ||||||||||||
| Right-of-use assets due to operating leases | 2,508 | 2,903 | 2,304 | 2,903 | ||||||||||||
| Total non-current assets | 4,312 | 4,824 | 4,201 | 4,824 | ||||||||||||
| Total Assets | $ | 14,469 | $ | 16,986 | $ | 13,658 | $ | 16,986 | ||||||||
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
| Interim Unaudited Condensed Consolidated Balance Sheets |
US dollars in thousands except share and per share data
| June 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Liabilities and Equity | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Short-term bank credit, short-term loans and current maturities of long-term bank loans | $ | 795 | $ | 542 | ||||||||||||
| Convertible short-term loan from a controlling shareholder | 77 | 625 | ||||||||||||||
| Short-term bank credit and loans and current maturities of long-term bank loans | $ | 1,863 | $ | 542 | ||||||||||||
| Convertible short-term loan from shareholders, including a controlling shareholder (See note 5) | 422 | 625 | ||||||||||||||
| Trade payables | 2,212 | 1,667 | 3,410 | 1,667 | ||||||||||||
| Other current liabilities | 4,270 | 2,283 | 2,519 | 2,283 | ||||||||||||
| Liabilities from discontinued operations - held for sale | - | 5,829 | - | 5,829 | ||||||||||||
| Total current liabilities | $ | 7,354 | $ | 10,946 | 8,214 | 10,946 | ||||||||||
| Long-Term Liabilities | ||||||||||||||||
| Long-term loans, net of current maturities | 8 | 14 | 24 | 14 | ||||||||||||
| Long-term liabilities due to operating leases, net of current maturities | 1,931 | 2,343 | 1,708 | 2,343 | ||||||||||||
| Accrued severance pay | 977 | 977 | 993 | 977 | ||||||||||||
| Total long-term liabilities | 2,916 | 3,334 | 2,725 | 3,334 | ||||||||||||
| Total Liabilities | 10,270 | 14,280 | 10,939 | 14,280 | ||||||||||||
| Commitments and Contingencies, see Note 6 | ||||||||||||||||
| Commitments and Contingencies | ||||||||||||||||
| Equity | ||||||||||||||||
| Ordinary shares of NIS 0.1 par value: Authorized – 100,000,000 shares as of June 30, 2021 and December 31, 2020; issued: 73,968,592 and 55,003,076 shares as of June 30, 2021 and December 31, 2020, respectively; outstanding: 72,789,893 and 53,824,377 shares as of June 30, 2021 and December 31, 2020, respectively | 2,008 | 1,423 | ||||||||||||||
| Shareholders’ Equity | ||||||||||||||||
| Ordinary shares of NIS 0.1 par value: Authorized – 100,000,000 shares as of September 30, 2021 and December 31, 2020; issued: 73,968,592 and 55,003,076 shares as of September 30, 2021 and December 31, 2020, respectively; outstanding: 72,789,893 and 53,824,377 shares as of September 30, 2021, and December 31, 2020, respectively | 2,008 | 1,423 | ||||||||||||||
| Additional paid-in capital | 233,391 | 227,209 | 233,406 | 227,209 | ||||||||||||
| Treasury shares at cost - 1,178,699 shares as of June 30, 2021 and December 31, 2020 | (2,000 | ) | (2,000 | ) | ||||||||||||
| Treasury shares at cost - 1,178,699 shares as of September 30, 2021 and December 31, 2020 | (2,000 | ) | (2,000 | ) | ||||||||||||
| Accumulated other comprehensive loss | (352 | ) | (961 | ) | (332 | ) | (961 | ) | ||||||||
| Accumulated deficit | (228,848 | ) | (222,965 | ) | (230,363 | ) | (222,965 | ) | ||||||||
| Total Equity | 4,199 | 2,706 | 2,719 | 2,706 | ||||||||||||
| Total Liabilities and Equity | $ | 14,469 | $ | 16,986 | $ | 13,658 | $ | 16,986 | ||||||||
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
| Interim Unaudited Condensed Consolidated Statements of Operations |
US dollars in thousands except share and per share data
| Three months ended June 30, | Six months ended June 30, | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||
| 2021 | (*)2020 | 2021 | (*)2020 | 2021 | (*) 2020 | 2021 | (*) 2020 | |||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Sales | $ | 2,446 | $ | 3,751 | $ | 4,833 | $ | 7,094 | $ | 4,632 | $ | 2,624 | $ | 9,465 | $ | 9,718 | ||||||||||||||||
| Software as a Service (“SaaS”) | 405 | 286 | 787 | 610 | 407 | 362 | 1,194 | 972 | ||||||||||||||||||||||||
| Total revenues | 2,851 | 4,037 | 5,620 | 7,704 | 5,039 | 2,986 | 10,659 | 10,690 | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||||||||||
| Cost of sales | 1,874 | 2,358 | 3,240 | 4,379 | 3,715 | 1,834 | 6,955 | 6,213 | ||||||||||||||||||||||||
| Total cost of revenues | 1,874 | 2,358 | 3,240 | 4,379 | 3,715 | 1,834 | 6,955 | 6,213 | ||||||||||||||||||||||||
| Gross profit | 977 | 1,679 | 2,380 | 3,325 | 1,324 | 1,152 | 3,704 | 4,477 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Research and development | 900 | 903 | 1,738 | 1,796 | 946 | 839 | 2,684 | 2,635 | ||||||||||||||||||||||||
| Selling and marketing | 736 | 885 | 1,341 | 1,583 | 701 | 765 | 2,042 | 2,348 | ||||||||||||||||||||||||
| General and administrative | 735 | 698 | 1,481 | 1,500 | 764 | 799 | 2,245 | 2,299 | ||||||||||||||||||||||||
| Total operating expenses | 2,371 | 2,486 | 4,560 | 4,879 | 2,411 | 2,403 | 6,971 | 7,282 | ||||||||||||||||||||||||
| Operating loss from continuing operations | (1,394 | ) | (807 | ) | (2,180 | ) | (1,554 | ) | (1,087 | ) | (1,251 | ) | (3,267 | ) | (2,805 | ) | ||||||||||||||||
| Loss from change in fair value of embedded derivative | - | - | (1,974 | ) | - | |||||||||||||||||||||||||||
| Other financial (expenses) income, net | (131 | ) | (109 | ) | (127 | ) | 67 | |||||||||||||||||||||||||
| Financial (expenses) income, net | (131 | ) | (109 | ) | (2,101 | ) | 67 | |||||||||||||||||||||||||
| Financial expenses derived from convertible short-term loan from shareholders | (345 | ) | - | (2,398 | ) | - | ||||||||||||||||||||||||||
| Other financial expenses, net | (112 | ) | (72 | ) | (160 | ) | (5 | ) | ||||||||||||||||||||||||
| Financial expenses, net | (457 | ) | (72 | ) | (2,558 | ) | (5 | ) | ||||||||||||||||||||||||
| Loss from continuing operations before taxes on income | (1,525 | ) | (916 | ) | (4,281 | ) | (1,487 | ) | (1,544 | ) | (1,323 | ) | (5,825 | ) | (2,810 | ) | ||||||||||||||||
| Income tax benefits (expenses) | �� | - | (12 | ) | 13 | (17 | ) | - | 8 | 13 | (9 | ) | ||||||||||||||||||||
| Loss from continuing operations | (1,525 | ) | (928 | ) | (4,268 | ) | (1,504 | ) | (1,544 | ) | (1,315 | ) | (5,812 | ) | (2,819 | ) | ||||||||||||||||
| Loss from discontinued operations | (1,197 | ) | (195 | ) | (1,615 | ) | (288 | ) | ||||||||||||||||||||||||
| Loss (income from discontinued operations) | 29 | (306 | ) | (1,586 | ) | (594 | ) | |||||||||||||||||||||||||
| Net loss | $ | (2,722 | ) | $ | (1,123 | ) | $ | (5,883 | ) | $ | (1,792 | ) | $ | (1,515 | ) | $ | (1,621 | ) | $ | (7,398 | ) | $ | (3,413 | ) | ||||||||
| Basic and diluted net loss attributable to shareholders per ordinary share (***) | ||||||||||||||||||||||||||||||||
Basic and diluted net loss attributable to shareholders per ordinary share | ||||||||||||||||||||||||||||||||
| From continuing operations | (0.02 | ) | (0.02 | ) | (0.07 | ) | (0.03 | ) | (0.02 | ) | (0.02 | ) | (0.09 | ) | (0.05 | ) | ||||||||||||||||
| From discontinued operations | (0.02 | ) | (**) | (0.03 | ) | (0.01 | ) | (** | ) | (0.01 | ) | (0.03 | ) | (0.01 | ) | |||||||||||||||||
| $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | (0.06 | ) | |||||||||||||||||||||
| $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.10 | ) | $ | (0.04 | ) | |||||||||||||||||||||
| Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share | 62,577,692 | (***)56,335,759 | 58,225,215 | (***)53,840,138 | 72,789,893 | (***)57,470,208 | 63,133,458 | (***)55,059,647 | ||||||||||||||||||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
| (**) | Less than $0.01 per ordinary share. |
| (***) | Basic and diluted net losses attributable to shareholders per ordinary share for previous reporting periods were retroactively adjusted due to the completion of rights offering, see Note 1E. |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
F-4
On Track Innovations Ltd.
and its Subsidiaries
| Interim Unaudited Condensed Consolidated Statements of Comprehensive Loss |
US dollars in thousands
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2021 | (*) 2020 | 2021 | (*) 2020 | |||||||||||||
| Total comprehensive loss: | ||||||||||||||||
| Net loss | $ | (1,515 | ) | $ | (1,621 | ) | $ | (7,398 | ) | $ | (3,413 | ) | ||||
| Exchange differences on translation released following sale of a subsidiary | - | - | 746 | - | ||||||||||||
| Exchange differences on translation of foreign continuing operations | 20 | 18 | (65 | ) | (13 | ) | ||||||||||
| Exchange differences on translation of foreign discontinued operations | - | 58 | (52 | ) | (64 | ) | ||||||||||
| Total comprehensive loss | $ | (1,495 | ) | $ | (1,545 | ) | $ | (6,769 | ) | $ | (3,490 | ) | ||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-5
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Comprehensive Loss
US dollars in thousands
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | (*)2020 | 2021 | (*)2020 | |||||||||||||
| Total comprehensive loss: | ||||||||||||||||
| Net loss | $ | (2,722 | ) | $ | (1,123 | ) | $ | (5,883 | ) | $ | (1,792 | ) | ||||
| Exchange differences on translation released following sale of a subsidiary | 746 | - | 746 | - | ||||||||||||
| Exchange differences on translation of foreign continuing operations | - | (49 | ) | (85 | ) | (31 | ) | |||||||||
| Exchange differences on translation of foreign discontinued operations | - | 190 | (52 | ) | (122 | ) | ||||||||||
| Total comprehensive loss | $ | (1,976 | ) | $ | (982 | ) | $ | (5,274 | ) | $ | (1,945 | ) | ||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Changes in Equity
US dollars in thousands except for number of shares
| 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 March 31, 2020 | 49,003,076 | $ | 1,256 | $ | 226,152 | $ | (2,000 | ) | $ | (1,268 | ) | $ | (217,501 | ) | $ | 6,639 | ||||||||||||
| Changes during the three months period ended June 30, 2020: | ||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $31 (*) | 6,000,000 | 167 | 1,002 | - | - | - | 1,169 | |||||||||||||||||||||
| Stock-based compensation | - | - | 16 | - | - | - | 16 | |||||||||||||||||||||
| Exchange differences on translation adjustments | - | - | - | - | 141 | - | 141 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,123 | ) | (1,123 | ) | |||||||||||||||||||
| Balance as of June 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,170 | $ | (2,000 | ) | $ | (1,127 | ) | $ | (218,624 | ) | $ | 6,842 | ||||||||||||
| Balance as of March 31, 2021 | 55,003,076 | $ | 1,423 | $ | 230,789 | $ | (2,000 | ) | $ | (1,098 | ) | $ | (226,126 | ) | $ | 2,988 | ||||||||||||
| Changes during the three months period ended June 30, 2021: | ||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $128 (*) | 18,965,516 | 585 | 2,587 | - | - | - | 3,172 | |||||||||||||||||||||
| Stock-based compensation | - | - | 15 | - | - | - | 15 | |||||||||||||||||||||
| Exchange differences on translation released following sale of a subsidiary | - | - | - | - | 746 | - | 746 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,722 | ) | (2,722 | ) | |||||||||||||||||||
| Balance as of June 30, 2021 | 73,968,592 | $ | 2,008 | $ | 233,391 | $ | (2,000 | ) | $ | (352 | ) | $ | (228,848 | ) | $ | 4,199 | ||||||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Changes in Equity
| Interim Unaudited Condensed Consolidated Statements of Changes in Equity |
US dollars in thousands except for number of shares
| Number of Shares issued | Share capital | Additional paid-in capital | Treasury Shares (at cost) | Accumulated other comprehensive Income (loss) | Accumulated deficit | Total equity | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 47,963,076 | $ | 1,226 | $ | 225,970 | $ | (2,000 | ) | $ | (974 | ) | $ | (216,832 | ) | $ | 7,390 | ||||||||||||||||||||||||||||||||||||||||
| Additional | Treasury | other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes during the six months period ended June 30, 2020: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Share | paid-in | Shares | comprehensive | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $39 (*) | 7,040,000 | 197 | 1,172 | - | - | - | 1,369 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued | capital | capital | (at cost) | Income (loss) | deficit | equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,170 | $ | (2,000 | ) | $ | (1,127 | ) | $ | (218,624 | ) | $ | 6,842 | ||||||||||||||||||||||||||||||||||||||||
| Changes during the three month period ended September 30, 2020: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 28 | - | - | - | 28 | - | - | 13 | - | - | - | 13 | ||||||||||||||||||||||||||||||||||||||||||
| Exchange differences on translation adjustments | - | - | - | - | (153 | ) | - | (153 | ) | - | - | - | - | 76 | - | 76 | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,792 | ) | (1,792 | ) | - | - | - | - | - | (1,621 | ) | (1,621 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,170 | $ | (2,000 | ) | $ | (1,127 | ) | $ | (218,624 | ) | $ | 6,842 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,183 | $ | (2,000 | ) | $ | (1,051 | ) | $ | (220,245 | ) | $ | 5,310 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 55,003,076 | $ | 1,423 | $ | 227,209 | $ | (2,000 | ) | $ | (961 | ) | $ | (222,965 | ) | $ | 2,706 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 73,968,592 | $ | 2,008 | $ | 233,391 | $ | (2,000 | ) | $ | (352 | ) | $ | (228,848 | ) | $ | 4,199 | ||||||||||||||||||||||||||||||||||||||||
| Changes during the six months period ended June 30, 2021: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes during the three month period ended September 30, 2021: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $128 (*) | 18,965,516 | 585 | 2,587 | - | - | - | 3,172 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 29 | - | - | - | 29 | - | - | 15 | - | - | - | 15 | ||||||||||||||||||||||||||||||||||||||||||
| Exchange differences on translation adjustments | - | - | - | - | (**)609 | - | 609 | - | - | - | - | 20 | - | 20 | ||||||||||||||||||||||||||||||||||||||||||
| Classification of embedded derivative from liability to equity (***) | - | - | 3,566 | - | - | - | 3,566 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (5,883 | ) | (5,883 | ) | - | - | - | - | - | (1,515 | ) | (1,515 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 73,968,592 | $ | 2,008 | $ | 233,391 | $ | (2,000 | ) | $ | (352 | ) | $ | (228,848 | ) | $ | 4,199 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 73,968,592 | $ | 2,008 | $ | 233,406 | $ | (2,000 | ) | $ | (332 | ) | $ | (230,363 | ) | $ | 2,719 | ||||||||||||||||||||||||||||||||||||||||
F-6
On Track Innovations Ltd.
and its Subsidiaries
| Interim Unaudited Condensed Consolidated Statements of Changes in Equity |
US dollars in thousands except number of shares
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Treasury | other | ||||||||||||||||||||||||||
| Number of | Share | paid-in | Shares | comprehensive | Accumulated | Total | ||||||||||||||||||||||
| Shares issued | capital | capital | (at cost) | Income (loss) | deficit | equity | ||||||||||||||||||||||
| Balance as of December 31, 2019 | 47,963,076 | $ | 1,226 | $ | 225,970 | $ | (2,000 | ) | $ | (974 | ) | $ | (216,832 | ) | $ | 7,390 | ||||||||||||
| Changes during the nine month period ended September 30, 2020: | ||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $39 (*) | 7,040,000 | 197 | 1,172 | - | - | - | 1,369 | |||||||||||||||||||||
| Stock-based compensation | - | - | 41 | - | - | - | 41 | |||||||||||||||||||||
| Exchange differences on translation adjustments | - | - | - | - | (77 | ) | - | (77 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (3,413 | ) | (3,413 | ) | |||||||||||||||||||
| Balance as of September 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,183 | $ | (2,000 | ) | $ | (1,051 | ) | $ | (220,245 | ) | $ | 5,310 | ||||||||||||
| Balance as of December 31, 2020 | 55,003,076 | $ | 1,423 | $ | 227,209 | $ | (2,000 | ) | $ | (961 | ) | $ | (222,965 | ) | $ | 2,706 | ||||||||||||
| Changes during the nine month period ended September 30, 2021: | ||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $128 (*) | 18,965,516 | 585 | 2,587 | - | - | - | 3,172 | |||||||||||||||||||||
| Stock-based compensation | - | - | 44 | - | - | - | 44 | |||||||||||||||||||||
| Exchange differences on translation adjustments | - | - | - | - | (**)629 | - | 629 | |||||||||||||||||||||
| Classification of embedded derivative from liability to equity (***) | - | - | 3,566 | - | - | - | 3,566 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (7,398 | ) | (7,398 | ) | |||||||||||||||||||
| Balance as of September 30, 2021 | 73,968,592 | $ | 2,008 | $ | 233,406 | $ | (2,000 | ) | $ | (332 | ) | $ | (230,363 | ) | $ | 2,719 | ||||||||||||
| (*) | See Note 10A. |
| (**) | Including exchange differences on translation released following sale of a subsidiary in amount of $746. |
| (***) | See Note 5. |
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
| Interim Unaudited Condensed Consolidated Statements of Cash Flows |
US dollars in thousands
| Six months ended June 30, | Nine months ended September 30, | |||||||||||||||
| 2021 | (*) 2020 | 2021 | (*) 2020 | |||||||||||||
| Cash flows from continuing operating activities | ||||||||||||||||
| Net loss from continuing operations | $ | (4,268 | ) | $ | (1,504 | ) | $ | (5,812 | ) | $ | (2,819 | ) | ||||
| Adjustments required to reconcile net loss to net cash used in provided by continuing operating activities: | ||||||||||||||||
| Stock-based compensation related to options issued to employees and others | 29 | 28 | ||||||||||||||
| Adjustments required to reconcile net loss to net cash used in by continuing operating activities: | ||||||||||||||||
| Stock-based compensation related to options and shares issued to employees and others | 44 | 41 | ||||||||||||||
| Accrued interest and linkage differences, net | (55 | ) | (162 | ) | (110 | ) | (102 | ) | ||||||||
| Transaction expenses related to convertible short-term loan received from shareholders | 10 | - | ||||||||||||||
| Loss from change in fair value of embedded derivative | 1,974 | - | ||||||||||||||
| Financial expenses derive from convertible short-term loan from shareholders | 2,398 | - | ||||||||||||||
| Depreciation and amortization | 200 | 212 | 290 | 314 | ||||||||||||
| Deferred tax (benefits) expenses, net | (13 | ) | 17 | (13 | ) | 9 | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Change in accrued severance pay, net | 5 | 11 | 17 | 21 | ||||||||||||
| (Increase) decrease in trade receivables, net | (1,143 | ) | 92 | |||||||||||||
| Increase in other receivables and prepaid expenses | (416 | ) | (92 | ) | ||||||||||||
| Increase in trade receivables, net | (2,848 | ) | (432 | ) | ||||||||||||
| (Increase) decrease in other receivables and prepaid expenses | (420 | ) | 306 | |||||||||||||
| (Increase) decrease in inventories | (263 | ) | 380 | (750 | ) | 253 | ||||||||||
| Increase in trade payables | 544 | 1,268 | 1,739 | 1,087 | ||||||||||||
| Increase (decrease) in other current liabilities | 173 | (283 | ) | 58 | (305 | ) | ||||||||||
| Net cash used in continuing operating activities | (3,223 | ) | (33 | ) | (5,407 | ) | (1,627 | ) | ||||||||
| Cash flows from continuing investing activities | ||||||||||||||||
| Purchase of property and equipment and intangible assets | (137 | ) | (283 | ) | (206 | ) | (336 | ) | ||||||||
| Change in short-term investments, net | (1,500 | ) | 511 | - | 1,715 | |||||||||||
| Net cash (used in) provided by continuing investing activities | (1,637 | ) | 228 | (206 | ) | 1,379 | ||||||||||
| Cash flows from continuing financing activities | ||||||||||||||||
| (Decrease) increase in short-term bank credit and loans, net | (1,474 | ) | 62 | |||||||||||||
| (Decrease) increase in short-term bank credit, net | (406 | ) | 70 | |||||||||||||
| Convertible short-term loan received from shareholders, net of transaction expenses | 923 | - | 923 | - | ||||||||||||
| Repayment of long-term bank loans | (2 | ) | (7 | ) | ||||||||||||
| Long-term loan received | 18 | - | ||||||||||||||
| Repayment of long-term loans | (4 | ) | (8 | ) | ||||||||||||
| Proceeds from issuance of shares, net of issuance costs | 3.209 | 1,369 | 3,209 | 1,369 | ||||||||||||
| Net cash provided by continuing financing activities | 2,656 | 1,424 | 3,740 | 1,431 | ||||||||||||
| Cash flows from discontinued operations | ||||||||||||||||
| Net cash used in discontinued operating activities | (91 | ) | (1,300 | ) | (1,724 | ) | (1,335 | ) | ||||||||
| Net cash provided by (used in) discontinued investing activities | 1,338 | (207 | ) | 2,926 | (658 | ) | ||||||||||
| Net cash (used in) provided by discontinued financing activities | (380 | ) | 799 | (380 | ) | 890 | ||||||||||
| Total net cash provided by (used in) discontinued operations | 867 | (708 | ) | 822 | (1,103 | ) | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (98 | ) | (86 | ) | (90 | ) | (45 | ) | ||||||||
| (Decrease) increase in cash, cash equivalents and restricted cash | (1,435 | ) | 825 | (1,141 | ) | 35 | ||||||||||
| Cash, cash equivalents and restricted cash - beginning of the period | (**)2,499 | (**)2,648 | (**)2,499 | (**)2,648 | ||||||||||||
| Cash, cash equivalents and restricted cash - end of the period | $ | 1,064 | $ | (**)3,473 | $ | 1,358 | $ | (**)2,683 | ||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
| (**) | Including cash and cash equivalents from discontinued operations held for sale. See also Note 8. |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-8
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash Flows
| Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont’d) |
US dollars in thousands
| Six months ended June 30 | Nine months ended September 30 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Supplementary cash flows activities: | ||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||
| Interest paid | $ | (*)55 | $ | 51 | $ | (*)69 | $ | 64 | ||||||||
| Income taxes paid | $ | - | $ | (**)40 | $ | - | $ | (**)41 | ||||||||
| Income tax refund received | $ | 6 | $ | - | $ | 6 | $ | 83 | ||||||||
| (*) | Including $7 that derives from discontinued operations. |
| (**) | Derives from discontinued operations. |
| Supplemental disclosures of non-cash flow information | ||||||||||||||||
| Payables due to issuance costs | $ | 37 | $ | - | $ | 37 | $ | - | ||||||||
| Payables due to purchase of property and equipment and intangible assets | $ | - | $ | 12 | $ | - | $ | 23 | ||||||||
| Payables due to purchase of property and equipment and intangible assets from discontinued operations - held for sale | $ | - | $ | (*)75 | $ | - | $ | (*)69 | ||||||||
| Classification of embedded derivative from liability to equity | $ | 3,566 | $ | - | $ | 3,566 | $ | - | ||||||||
| (*) | Derives from discontinued operations |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-9
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, 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.
The Company’s ordinary shares are quoted for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 31, 2019).
As of JuneSeptember 30, 2021, the Company operates in two operating segments: (a) Retail, and (b) Petroleum (see Note 11). The Company completed the sale of its Mass Transit Ticketing operation in April 2021 (see Note 1C(2)). The Company has determined that the Mass Transit Ticketing business qualifies as a discontinued operation. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. In addition, the sale of the Mass Transit Ticketing business qualified as held for sale as of December 31, 2020.
| 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, 2020.
In the opinion of management, all adjustments considered necessary for a fair statement, consisting of normal recurring adjustments, have been included. Operating results for the six-nine month period and the three-month period ended JuneSeptember 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive loss that are reported in the Interim Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.
F-10
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
| C. | Divestiture of operations |
| 1. | In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property relating to its Smart ID division, for a total purchase price of $10,000 in cash and an additional $12,500 subject to performance-based milestones. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. |
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 claimsclaimed that additional earn-out payments havepayment was not been paid to the Company. SuperCom raised claims against the Company during the arbitration for material damages. An arbitration decision was issued on December 24, 2018 in the Company’s favor and denied SuperCom’s claims. The arbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that the Company iswas entitled to receive, and to pay the Company accordingly, or otherwise pay the Company approximately $1,300 that reflects the maximum earn-out amount that haswas not yet been paid to the Company by SuperCom. The arbitration verdict was approved as a court’s verdict in June 2019, but SuperCom failed to disclose the financial information in the way it should have done according to the arbitration decision. Therefore, in December 2019 the Company submitted a complementary claim to the arbitrator, asking for a final award that includes a final payment by SuperCom (as opposed to merely disclosing information). On January 21, 2021, after conclusion of the evidence phase in the arbitration, and after the Company already filed its summaries, SuperCom submitted new documents claiming that these include the missing financial information. Following the submission of these documents, on February 9, 2021, the Company submitted an application claiming that implementing the contractual sanction mechanism on the amounts presented in these documents testifies to the Company’s entitlement to the maximum earn-out amount, and, therefore, the arbitrator iswas requested to order that the parties will complete their summaries and then a verdict will be given. On March 8, 2021, the arbitrator accepted the Company’s application and on April 11, 2021, the Company submitted complementary summaries. Following an arbitration process between the Company and SuperCom, on August 10, 2021, the parties entered into a settlement agreement that concluded the legal proceedings with SuperCom. For further details see Notes 6A(1) and 6A(2).
F-11
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
| C. | Divestiture of operations (cont’d) |
| 2. | On March 29, 2021, the Company entered into an agreement (the “Sale Agreement”) for the sale of 100% of the issued and outstanding share capital of its wholly owned Polish subsidiary, ASEC S.A. (“ASEC”), with Vector Software SP. Z O.O. (the “Buyer”). ASEC is headquartered in Krakow, Poland, and |
The sale of ASEC was completed on April 21, 2021. The Company has determined that the Mass Transit Ticketing business qualifies as a discontinued operation. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. In addition, assets and liabilities of the Polish subsidiary and assets and liabilities related to the Mass Transit Ticketing operation that have not yet been actually sold as of December 31, 2020, are presented as assets and liabilities held for sale in the balance sheets as of December 31, 2020.
The consideration for ASEC after reduction of some working capital adjustments, as agreed in April 2021, is approximately $2,700, out of which: (i) approximately $2,100 was transferred from the Buyer to ASEC at the end of March 2021 in order to repay Polish bank loans, out of which approximately $1,700 was repaid as of March 31, 2021 and a loan of approximately $400 was repaid at the beginning of April 2021 and (ii) $600 was paid by the Buyer to the Company in April 2021.
The Sale Agreement contains customary representations and warranties, as well as covenants, including an undertaking the Company provided not to compete with the business of ASEC for a period of five years after the closing and an undertaking to indemnify ASEC and the Buyer for certain damages. The Company’s liability is limited to the purchase price actually paid by the Buyer.
| D. | Liquidity and Capital Resources |
The Company has had recurring losses and cash outflows from operating activities. It has an accumulated deficit as of JuneSeptember 30, 2021 of $228,848.$230,363. As of JuneSeptember 30, 2021 the Company also has a payable balance on its short-term bank loans, that is due within the next 12 months, of $795$1,863 and a convertible short-term loan from shareholders, including a controlling shareholder , including accrued interest, of $1,661$1,702 (out of which, only amounts of $77$422 is presented as a liability within ‘convertible short-term loan from shareholders, including a controlling shareholder’), that, if not converted, would mature in December 2021 (see also Note 5).
Since inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities (regarding the issuance of shares during the last two years, see Note 10A), borrowings from banks, government and shareholders, including convertible loans, proceeds from the exercise of options and warrants as well as proceeds from the divestiture of parts of the Company’s businesses. The Company had cash, cash equivalents and short-term investments representing bank deposits of $2,564 (of which an amount of $105 has been pledged as security for certain items)$1,253 as of JuneSeptember 30, 2021.
F-12
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
| D. | Liquidity and Capital Resources (cont’d) |
The recent situation in Poland resulting from the coronavirus (“COVID-19”) pandemic, led to an almost complete stop to the Company’s Mass Transit Ticketing sales business, which negatively impacted the Company’s cash flow. The revenues from this operation, that were relatively stable during the year preceding the COVID-19 outbreak, decreased by $295 in the first quarter of 2021 compared to the first quarter of 2020, mainly due to lockdowns and other restrictions and consequences of the COVID-19 pandemic as started in March 2020. On April 21, 2021, the Company completed the sale of ASEC, including its Mass Transit Ticketing activity, as mentioned in Note 1C(2). The results, including the revenues, and the cash flows of the Mass Transit Ticketing operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.
The Company’s managementSince the extension of the date of the repayment of the Loan Amount on June 17, 2021 to Extended Maturity Date, the Company has been working on updatingwith the Company’s strategy forLead Lender, to either convert the coming yearsLoan Amount to equity or further extend the repayment date of the Loan Amount in order to realizecontinue to advance the Company's goals and meet its potential, resume its growth, and ultimately create shareholder value.projections. The Company raised additional funds and increased its cash, cash equivalents and short-term investments on May 19, 2021, as mentioned in Note 10A(2). Additionally, a portion of additional revenueis still working through this matter, but given the proximity to the Extended Maturity Date, the Company was hoping to recognize inis uncertain regarding the second quarter has become backlogged due to a shortage in components,likelihood of achieving of these two alternatives. Based on the projected cash flows and the Company’s cash balances as further described below, and will be delivered later in the year. Therefore,of September 30, 2021, the Company believes that if the Loan Amount is paid in December and without further fund raising, it haswould have only sufficient capital resourcesfunds to fundcontinue to operate its business until the end of the third quarter of 2022, and we cannot assure that the Company will be able to continue its operations for a period of at least the next 12 months. In addition,As a result, there is a substantial doubt regarding the Company’s ability to continue as a going concern. The Company is attempting to raise additional funds and in connection therewith, the Company engaged an investment bankis negotiating the terms of the Loan Agreement with the Lead Lender, that could address the Company’s projected cash needs. While the Company’s management believes in its ability to explore strategic optionsraise additional funds and is investing resources in this process.increase its cash, there can be no assurances to that effect. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In connection with the outbreak of COVID-19, the Company has taken steps to protect its workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include working from home where possible, minimizing face-to-face meetings, utilizing video conference as much as possible, social distancing at facilities and elimination of most international travel. The Company continues to comply with all local health directives.
The Company has continued to see an interest from new customers, potential customers and partners as they forecasted that the need for the Company’s products will grow, yet execution of closing is still slow due to the current business environment.
While interest from current and new customers is growing, which is reflected in an increasing rate of orders, a global shortage in components, which caused an increase in components prices, freight cost and longer lead-time, has created a delay in fulfilling customers’ orders which impacted the Company’s revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, the Company encourages its customers to provide their forecast for their demand and continues to maintain a comprehensive network of world-wide suppliers in order to optimize its access to critical components. In addition, during last few months the Company purchased an amount of such components to be used for sales later this year. As long as the COVID-19 pandemic continues, the components’ lead-time may be longer than normal and the shortage in components may continue or get worse.
It is difficult to predict what other impacts the COVID-19 pandemic may have on the Company.
F-13
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
| E. | Retroactively adjustment of basic and diluted net losses attributable to shareholders per ordinary share (the “EPS”) for previous reporting periods |
At the beginning of the second quarter of 2021, the Company offered its shareholders to purchase additional ordinary shares as part of a rights offering (the “Rights Offering”). The Rights Offering was concluded on May 19, 2021 by issuance of shares, as mentioned in Note 10A(2). The Rights Offering included an offer to all existing shareholders of the Company to purchase additional ordinary shares in consideration for a lower exercise price than the quoted share price in the active market, reflects a bonus element that is somewhat similar to a stock dividend. Therefore, basic and diluted ESPEPS was adjusted retroactively for the bonus element for all periods presented. In computing the adjustment factor to the EPS, the Theoretical ex-rights fair value per share was computed by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights and dividing by the number of shares outstanding after the exercise of the rights. The resulting adjusted factor was 1.069 and 1.071approximately 1.07 for the three months and the sixnine months ended JuneSeptember 30, 2020, respectively.
Note 2 –- Significant Accounting Policies
Except as described in Note 2A below, these interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2020.
| A. | Recently Adopted Accounting Pronouncements |
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This ASU, among other things, removes the exception to the incremental approach for intra-period allocation of tax expense when a company has a loss from continuing operations and income from other items that are not included in continuing operations, such as income from discontinued operations, or income recorded in other comprehensive income. The general rule under Accounting Standards Codification (“ASC”) 740-20-45-7 is that the tax effect of pretax income or loss from continuing operations should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. Previously, companies could consider the impact on a loss from continuing operations of items in discontinued operations or other comprehensive income. However, under the amended guidance, companies should not consider the effect of items outside of continuing operations in calculating the tax effect on continuing operations. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of this accounting standard did not have a material effect on ourthe Company’s financial position, results of operations and cash flows.
| B. | Recent accounting pronouncements |
| 1. | In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. |
F-14
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 –- Significant Accounting Policies (cont’d)
| B. | Recent accounting pronouncements (cont’d) |
| 1. | (Cont’d) |
The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company currently does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements.
| 2. | In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This pronouncement simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, the ASU simplifies accounting for convertible instruments by removing major separation models required under current accounting standard. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for it and simplifies the diluted earnings per share calculations in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted for annual period beginning after December 15, 2020. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements. |
Note 3 - Other Receivables and Prepaid Expenses
| June 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Government institutions | $ | 75 | $ | 104 | $ | 9 | $ | 104 | ||||||||
| Prepaid expenses | 277 | 257 | 217 | 257 | ||||||||||||
| Supplier advances | 730 | 227 | 848 | 227 | ||||||||||||
| Other current receivables | (*) 1,630 | 107 | 68 | 107 | ||||||||||||
| $ | 1,142 | $ | 695 | |||||||||||||
| $ | 2,712 | $ | 695 | |||||||||||||
(*) See Note 6A(2).
Note 4 - Other Current Liabilities
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Employees and related expenses | $ | 795 | $ | 516 | ||||
| Accrued expenses | 882 | 811 | ||||||
| Customer advances | 76 | 142 | ||||||
| Short-term liabilities due to operating leases and current maturities | 720 | 762 | ||||||
| Other current liabilities | (*) 1,797 | 52 | ||||||
| $ | 4,270 | $ | 2,283 | |||||
(*) See Note 6A(2).
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Government institutions | $ | 137 | $ | 15 | ||||
| Employees and related expenses | 666 | 516 | ||||||
| Accrued expenses | 841 | 811 | ||||||
| Customer advances | 96 | 142 | ||||||
| Short-term liabilities due to operating leases and current maturities | 736 | 762 | ||||||
| Other current liabilities | 43 | 37 | ||||||
| $ | 2,519 | $ | 2,283 | |||||
F-15
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 5 –- Convertible short-term loan from shareholders, including a controlling shareholder
On December 9, 2020, the Company entered into a loan financing agreement (the “Loan Agreement”), with Jerry L. Ivy, Jr., Descendants’ Trust (“Ivy”, or the “Lender”), the Company’s Controlling Shareholder (as such term is defined under the Israeli Companies Law, 5759-1999, as amended (the “Companies Law”)). The Loan Agreement provides that the Lender will extend a loan to the Company in the amount of up to $1,500 (the “Loan Amount”), payable in two tranches: one of $625 at the initial closing that took place on December 17, 2020, and the other of $875 at the second closing that took place on January 28, 2021. The amount lent under the Loan Agreement is secured pursuant to a debenture by a first priority floating charge over all the Company’s tangible or intangible assets and other property, the Company owns, subject only to certain permitted security interests, as set forth in Loan Agreement. The amount lent under the Loan Agreement and all accrued interest was scheduled to mature on June 17, 2021 (the “Initial Maturity Date”), and was to be payable in full on the Initial Maturity Date, provided that the maturity date could be extended by six months at the sole option of Ivy. The amount lent bears interest on all outstanding principal at an interest rate of 8.0% per annum, (the “Interest”); provided, however, that upon an extension of the maturity period beyond the Initial Maturity Date, the Interest will automatically increase, effective as of the Initial Maturity Date, to the rate of 10.0% per annum. Also, in case of an extension of the Initial Maturity Date, the accrued interest for the first six months for which the Loan Amount has been outstanding will be payable by the Company to the Lender at the time of the extension, and the accrued Interest for the extension period was to be payable by the Company on the extended maturity date. In addition, the Company may repay the amount lent, in whole and not in part, and any accrued Interest thereon, at any time prior to the Initial Maturity Date (as it may be extended), in its sole discretion. On March 2, 2021, the Company obtained shareholders’ approval to the grant of a right to Ivy, pursuant to which, at any time prior to the repayment in full of the amount lent, together with Interest accrued and all other amounts outstanding under the Loan Agreement (the “Secured Amount”), Ivy will be entitled, at its sole discretion, to demand to convert (the “Conversion Right”) the entire Secured Amount into the Company’s Ordinary Shares, at a price per share equal to the lower of (a) $0.20 per share (subject to adjustment in the event of any bonus shares, combinations or splits) and (b) a price per share reflecting a discount to the average closing bid price of an Ordinary Share over the 20 trading days preceding the Initial Closing (the “Benchmark Price”) ($0.248), as follows: (i) if conversion occurs until March 17, 2021 (no later than three months after the initial closing), the conversion price per share will be $0.1984 (reflects discount of 20% of the Benchmark Price); (ii) if conversion occurs between March 18, 2021, and June 17, 2021 (more than three months but no later than six months after the initial closing), the conversion price per share will be $0.1736 (reflects discount of 30% of the Benchmark Price); (iii) if conversion occurs after June 17, 2021 (more than six months after the initial closing (to the extent extended in accordance with the terms of the Loan Agreement)), the conversion price per share will be $0.124 (reflects discount of 50% of the Benchmark Price); and (iv) if conversion occurs upon an event of default, the conversion price per share will be $0.124 (reflects discount of 50% of the Benchmark Price).
Pursuant to the Loan Agreement, the Conversion Right will become effective only following the approval thereof by the shareholders of the Company in accordance with the requirements of the Companies Law, which approval applies to a controlling shareholder transaction that includes a private offering that may increase the holdings of a controlling shareholder to and above 45% of the share capital of the Company, and will be deemed of no force or effect at any time prior to obtaining such Shareholders'Shareholders’ Approval, if at all. The Company obtained such shareholders’ approval on March 2, 2021.
The Loan Agreement includes customary events of default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the Loan Agreement, etc. If an event of default occurs, the Secured Amount shall immediately become due and payable, without the need for any notice by the Lender.
F-16
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 5 - Convertible short-term loan from shareholders, including a controlling shareholder (cont’d)
The Loan Agreement was subsequently amended to allow for an additional lender (“the additional lender”) to lend $100 under the same terms as Ivy. Accordingly, the aggregate gross amount the Company received under the Loan Agreement is $1,600, out of which $975 took place as part of the second closing on January 28, 2021.
On June 17, 2021, the Lender, being the majority of the lenders, exercised its option to extend the Initial Maturity Date, and the parties entered into a notice of exercise of option and agreement (the “Extension Agreement”), according to which the maturity date was extended until December 17, 2021 (the “Extended Maturity Date”). Pursuant to both the Loan Agreement and the Extension Agreement, the interest rate automatically increased, effective as of the Initial Maturity Date, to the rate of 10.0% per annum (the “Extension Interest”). Any payment of interest is subject to withholding of taxes at source and the interest rates mentioned above are net of such withholding. The net amount of interest on the Loan Amount accrued through June 17, 2021 was approximately $55 (the “Interest Debt”). Under the Extension Agreement, it was agreed that the Interest Debt shall be payable on the Extended Maturity Date, while until then it shall be considered part of the Loan Amount and shall bear the Extension Interest rate. As of June 30, 2021, the Secured Amount is $1,661. In the event of a conversion of the Loan Amount, the Interest Debt shall convert into Ordinary Shares of the Company at the conversion price of $0.174 per share, and the remaining Secured Amount shall be converted at a price per share of $0.124, as originally contemplated under the Loan Agreement. As of September 30, 2021, the Secured Amount is $1,702 , out of which $102 is accrued interest expenses.
In accordance with ASC 815-15-25, Derivatives and Hedging, the conversion feature (“the conversion component”) was considered embedded derivative instrument. Since, as described above, the conversion component was required to be approved by the shareholders of the Company, the conversion
component did not qualify for the scope exception under ASC 815-10-15-74(a). Therefore, the conversion component is to be recorded separately from the loan component. The conversion component is measured both initially and in subsequent periods until obtaining the shareholders’ approval of the Conversion Right, at fair value, with changes in fair value charged to finance expenses, net.
The fair value of the conversion component at the initial closing, December 17, 2020, was estimated using the Trinomial model based on the assumptions, as follows:
| Expected volatility (%) | 125.2 | % | ||
| Risk-free interest rate (%) | 0.09 | % | ||
| Expected dividend yield | 0 | % | ||
| Contractual term (years) | 0.500 | |||
| Conversion price (US dollars per share) | 0.124 | |||
| Underlying Share price (US dollars per share) | 0.220 |
Based on the Trinomial model, the fair value of the conversion component of the initial closing was $617 as of December 17, 2020. Accordingly, the loan component at the initial closing was $8 as of December 17, 2020.
There were no significant changes in the model assumptions as of December 31, 2020, compared to the assumptions as of December 17, 2020, as mentioned above. Therefore, the conversion component and the loan component were $617 and $8, respectively, as of December 31, 2020. Both components were presented as Convertible short-term loan from a controlling shareholder within the short-term liabilities as of December 31, 2020.
F-17
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 5 - Convertible short-term loan from shareholders, including a controlling shareholder (cont’d)
The fair value of the conversion component at the second closing, January 28, 2021, was estimated using the Trinomial model based on the assumptions, as follows:
| Expected volatility (%) | 103.23 | % | ||
| Risk-free interest rate (%) | 0.075 | % | ||
| Expected dividend yield | 0 | % | ||
| Contractual term (years) | 0.386 | |||
| Conversion price (US dollars per share) | 0.124 | |||
| Underlying Share price (US dollars per share) | 0.240 |
Based on the Trinomial model, the entire proceeds of the second closing in amount of $975 were allocated to the conversion component and the residual balance of the of the loan component of the second closing is zero.
The table below summarizes the balances of the conversion components and the loan components of the initial closing and the second closing, as follows:
| Conversion component | Loan component | Total | ||||||||||
| Initial closing | $ | 617 | $ | 8 | $ | 625 | ||||||
| Second closing | 975 | - | 975 | |||||||||
| $ | 1,592 | $ | 8 | $ | 1,600 | |||||||
On March 2, 2021, the Company obtained shareholders’ approval of the Conversion Right. At this shareholders meeting date, the fair value of the conversion component of both the initial closing and second closing was estimated using the Trinomial model based on the assumptions, as follows:
| Expected volatility (%) | 107.34 | % | ||
| Risk-free interest rate (%) | 0.044 | % | ||
| Expected dividend yield | 0 | % | ||
| Contractual term (years) | 0.296 | |||
| Conversion price (US dollars per share) | 0.124 | |||
| Underlying Share price (US dollars per share) | 0.390 |
The change in the fair value of the conversion component is as follows:
| Conversion component | ||||
| Fair value before the shareholders’ approval date | $ | 1,592 | ||
| Change in fair value (*) | 1,974 | |||
| Fair value at the shareholders’ approval date | $ | 3,566 | ||
| (*) | This amount is recorded as loss from change in fair value of embedded derivative as part of the financial expenses in the statements of operations of the first quarter of 2021. |
Following the shareholders’ approval of the Conversion Right on March 2, 2021, the conversion component is qualifying for the scope exception under ASC 815-10-15-74(a). In accordance with ASC 815-15-35-4, since the embedded conversion option in the convertible debt no longer meets the bifurcation criteria, the fair value of the conversion component, in the amount of $3,566, was reclassified from short-term liability to shareholders equity at this approval date.
The change in the balance of the Loan component following the shareholders’ approval of the Conversion Right on March 2, 2021, is as follows:
| Loan component | Loan component | |||||||
| Balance as of March 2, 2021 | $ | 8 | $ | 8 | ||||
| Financial expenses | 69 | |||||||
| Interest and amortization of debt discount and expense | 69 | |||||||
| Balance as of June 30, 2021 | $ | 77 | 77 | |||||
| Interest and amortization of debt discount and expense | 345 | |||||||
| Balance as of September 30, 2021 | $ | 422 | ||||||
F-18
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 6 - Commitments and Contingencies
A. Legal claims In June 2013, prior to the Company’s divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liability the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions, plus expenses and legal fees, as well as a right to receive additional information from the Company regarding an additional engagement period in Tanzania and a right to possibly receive additional amounts from the Company, if at all, according to the information that will be provided. The arbitration decision had been appealed and the appeal was denied on June 17, 2018. In order to collect the award, Merwell filed a motion against the Company and the Nazareth District Court issued a judgment requiring the Company to pay Merwell an amount of NIS 5,080 (approximately $1,370) that was paid by the Company on January 8, 2019.
As mentioned above, based on the agreement with SuperCom from April 2016 (which was granted an effect of a court judgment), SuperCom was liable for all the costs and liabilities arising out of this claim. Since SuperCom failed to pay the Company the amounts due, in February 2019 the Company initiated an arbitration process to collect from SuperCom, the amount paid to Merwell, as well as any complementary amounts, as may be ordered in the future.
Concurrently and subject to the fulfillment of the arbitration process between the Company and SuperCom, on August 10, 2021, the parties entered into a settlement agreement that concluded the legal proceedings with SuperCom. For further details see Notes 6A(2) below.
| On 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. On September 16, 2020, Merwell filed a request to amend the additional amount claimed from approximately $1,618 to approximately $3,012. As mentioned above, the Company was 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. On August 10, 2021, the Company reached settlement agreements with both Merwell and SuperCom. Both settlements are, as noted above, linked, as SuperCom was deemed liable for all costs and expenses arising out of the claim made by Merwell. As part of the settlement with Merwell, the Company paid NIS 5,700 (approximately $1,766) on August 10, 2021, and as part of the settlement with SuperCom (that concluded the legal proceedings, as mentioned in Notes 1C(1) and 6A above), the Company received NIS 5,128 (approximately $1,589) on August 10, 2021. The |
F-19
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 6 - Commitments and Contingencies (cont’d)
| A. | Legal claims (cont’d) |
| In October 2013, a financial claim was filed against the Company and its then French subsidiary, Parx France (in this paragraph, together, the “Defendants”), in the Commercial Court of Paris, France (in this paragraph, the “Court”). The sum of the claim |
| In July 2019, the Company received a request (the “Request”), to allow a petitioner to submit a class action, which concerns the petitioner’s claims that, inter alia, through the EasyPark card, drivers are permitted to exceed the quota of permitted hours in accordance with the instructions of various local authorities in Israel. The Request was submitted against a company incorporated by the buyer of the assets (including the parking activity) of the Israeli subsidiaries of the Company (the “Company’s Subsidiaries”) and against two other companies that operate technological means for payment for public parking spaces scattered throughout the cities. Since the majority of potential claims against the Company’s Subsidiaries relate to the period following the sale of the Company’s Subsidiaries’ assets, including the parking activity, it appears that the Company’s exposure through this channel is limited. Furthermore, even if payment will be required, the buyer would be liable for the majority of such payment. Therefore, the Company will not participate in such procedure at this stage. Based on the assessment of the Company’s external legal counsel, the exposure of the Company is low. |
F-20
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 6 - Commitments and Contingencies (cont’d)
| B. | Other contingency |
The Company has entered into several research and development agreements, pursuant to which the Company received grants from the Israel Innovation Authority (“IIA”), and is therefore obligated to pay royalties to the IIA at a rate of 3%-3.5%-3.5% of its sales up to the amounts granted (linked to the U.S. dollar with annual interest at LIBOR as of the date of approval, for programs approved from January 1, 1999 and thereafter). The total amount of grants received as of JuneSeptember 30, 2021, net of royalties paid, was approximately $3,400 (including accrued interest). No grants from the IIA were received during the sixnine months ended JuneSeptember 30, 2021 and 2020.
There is a dispute between the Company and the IIA in the amount of approximately NIS 3,600 ($1,104)1,115) including accrued interest (while the current debt to the IIA as presented in the Company’s financial statements amounts to approximately $156)$145) due to a claim of the IIA about miscalculations in the amount of royalties paid by the Company and the revenues on which the Company must pay royalties. The Company has not yet completed its discussions with the IIA and intends to exhaust all options in order to resolve this matter in a favorable manner. Management believes that, at the current stage, it is more likely than not that a positive resolution will be applied to this dispute. Accordingly, no additional accrual has been recorded in the financial statements in respect of this matter.
During the sixnine months ended JuneSeptember 30, 2021 and 2020, there were no royalty expenses.
| C. | Guarantees |
As of JuneSeptember 30, 2021, the Company granted a bank guarantee in an amount of $105, with an expiration date in May 2024.
F-21
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 7 –- Revenues
Disaggregation of revenue
The following tables disaggregate the Company’s revenuesrevenue by major source based on categories that depict its nature and timing as reviewed by management for the three months ended JuneSeptember 30, 2021 and 2020:
| Three months ended September 30, | ||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||
| Three months ended June 30, 2021 | ||||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Cashless payment products (A) | $ | 1,170 | $ | - | $ | 1,170 | $ | 2,996 | $ | - | $ | 2,996 | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||||||||||||||
| Sales of products (B1) | 807 | 409 | 1,216 | 1,205 | 283 | 1,488 | ||||||||||||||||||
| SaaS and other services (B2) | 202 | 263 | 465 | 313 | 242 | 555 | ||||||||||||||||||
| 1,009 | 672 | 1,681 | 1,518 | 525 | 2,043 | |||||||||||||||||||
| Total revenues | $ | 2,179 | $ | 672 | $ | 2,851 | $ | 4,514 | $ | 525 | $ | 5,039 | ||||||||||||
| Three months ended September 30, | ||||||||||||||||||||||||
| 2020 (*) | ||||||||||||||||||||||||
| Three months ended June 30, 2020(*) | ||||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Cashless payment products (A) | $ | 1,701 | $ | - | $ | 1,701 | $ | 1,830 | $ | - | $ | 1,830 | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||||||||||||||
| Sales of products (B1) | 1,651 | 304 | 1,955 | 224 | 529 | 753 | ||||||||||||||||||
| SaaS and other services (B2) | 204 | 177 | 381 | 176 | 227 | 403 | ||||||||||||||||||
| 1,855 | 481 | 2,336 | 400 | 756 | 1,156 | |||||||||||||||||||
| Total revenues | $ | 3,556 | $ | 481 | $ | 4,037 | $ | 2,230 | $ | 756 | $ | 2,986 | ||||||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
F-22
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 7 –- Revenues (cont’d)
Disaggregation of revenue (cont’d)
The following tables disaggregate the Company’s revenuesrevenue by major source based on categories that depict its nature and timing as reviewed by management for the sixnine months ended JuneSeptember 30, 2021 and 2020:
| Nine months ended September 30, | ||||||||||||||||||||||||
| Six months ended June 30, 2021 | 2021 | |||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Cashless payment products (A) | $ | 2,694 | $ | - | $ | 2,694 | $ | 5,690 | $ | - | $ | 5,690 | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||||||||||||||
| Sales of products (B1) | 1,228 | 648 | 1,876 | 2,433 | 931 | 3,364 | ||||||||||||||||||
| SaaS and other services (B2) | 539 | 511 | 1,050 | 852 | 753 | 1,605 | ||||||||||||||||||
| 1,767 | 1,159 | 2,926 | 3,285 | 1,684 | 4,969 | |||||||||||||||||||
| Total revenues | $ | 4,461 | $ | 1,159 | $ | 5,620 | $ | 8,975 | $ | 1,684 | $ | 10,659 | ||||||||||||
| Nine months ended September 30, | ||||||||||||||||||||||||
| Six months ended June 30, (*) 2020 | 2020 (*) | |||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Cashless payment products (A) | $ | 4,092 | $ | - | $ | 4,092 | $ | 5,922 | $ | - | $ | 5,922 | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||||||||||||||
| Sales of products (B1) | 1,930 | 875 | 2,805 | 2,154 | 1,404 | 3,558 | ||||||||||||||||||
| SaaS and other services (B2) | 403 | 404 | 807 | 579 | 631 | 1,210 | ||||||||||||||||||
| 2,333 | 1,279 | 3,612 | 2,733 | 2,035 | 4,768 | |||||||||||||||||||
| Total revenues | $ | 6,425 | $ | 1,279 | $ | 7,704 | $ | 8,655 | $ | 2,035 | $ | 10,690 | ||||||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
F-23
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 7 –- Revenues (cont’d)
Disaggregation of revenue (cont’d)
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.
| 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. | SaaS and other 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 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
| June 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Trade receivables, net of allowance for doubtful accounts | $ | 2,139 | $ | 1,148 | $ | 3,839 | $ | 1,148 | ||||||||
| Customer advances | $ | 76 | $ | 142 | $ | 96 | $ | 142 | ||||||||
Trade receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
F-24
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 7 –- Revenues (cont’d)
Transaction price and variable consideration
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration, revenue is recognized over time as it is mainly attributed to ongoing services provided.
Note 8 – Discontinued operations
As described in Note 1C, the Company divested its interest in ASEC, including its Mass Transit Ticketing activity, and the SmartID division and presented these activities as discontinued operations.
Set forth below are the results of the discontinued operations:
| Three months ended June 30, | Six months ended June 30, | Three months ended | Nine months ended September 30, | |||||||||||||||||||||||||||||
| 2021 | (*)2020 | 2021 | (*)2020 | 2021 | (*) 2020 | 2021 | (*) 2020 | |||||||||||||||||||||||||
| Revenues | $ | - | $ | 817 | $ | 488 | $ | 1,600 | $ | - | $ | 651 | $ | 488 | $ | 2,251 | ||||||||||||||||
| Expenses | (275 | ) | (1,012 | ) | (1,152 | ) | (1,888 | ) | - | (957 | ) | (1,152 | ) | (2,845 | ) | |||||||||||||||||
| Other loss, net | (**)(922 | ) | - | (**)(951 | ) | - | 29 | - | (**)(922 | ) | - | |||||||||||||||||||||
| Net loss from discontinued operations | $ | (1,197 | ) | $ | (195 | ) | $ | (1,615 | ) | $ | (288 | ) | ||||||||||||||||||||
| Net (loss) income from discontinued operations | $ | 29 | $ | (306 | ) | $ | (1,586 | ) | $ | (594 | ) | |||||||||||||||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
| (**) | Mainly including net loss of $177 due to the legal proceedings, as mentioned in Note 6A(2), and loss of $746 due to transfer of the exchange differences on translation, as derived from ASEC, from other comprehensive loss to the statement of operations loss (see statements of comprehensive loss). |
F-25
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 8 –- Discontinued operations (cont’d)
The following table summarizes information about assets and liabilities from discontinued operations held for sale as of December 31, 2020:
| December 31, | ||||||||
| 2020 | December 31, | |||||||
| Assets held for sale from discontinued operations: | 2020 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,017 | $ | 1,017 | ||||
| Trade receivables, net of allowance for doubtful accounts of $42 | 409 | 409 | ||||||
| Other receivables and prepaid expenses | 454 | 454 | ||||||
| Inventories | 392 | 392 | ||||||
| Property, plant and equipment, net | 3,136 | 3,136 | ||||||
| Intangible assets, net | 370 | 370 | ||||||
| Right-of-use assets due to operating leases | 580 | 580 | ||||||
| 6,358 | 6,358 | |||||||
| Liabilities held for sale from discontinued operations: | ||||||||
| Current liabilities: | ||||||||
| Short-term bank credit and current maturities of long-term loans | 2,339 | 2,339 | ||||||
| Trade payables | 1,832 | 1,832 | ||||||
| Other current liabilities | 443 | 443 | ||||||
| Long-term loans, net of current maturities (*) | 642 | 642 | ||||||
| Long-term liabilities due to operating leases, net of current maturities (*) | 401 | 401 | ||||||
| Deferred tax liability | 172 | 172 | ||||||
| 5,829 | 5,829 | |||||||
| (*) | Those liabilities were received for a long-term (more than twelve months) in ASEC, but were presented as held for sale within the current assets as of December 31, 2020, because the Company has determined that the sale of ASEC qualified as held for sale and as a discontinued operation as of December 31, 2020. |
F-26
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 9 - Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, short-term interest bearing investments, accounts receivable, restricted deposits for employee benefits, accounts payable and short-term and long-term loans.
Fair value for the measurement of financial assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes a valuation hierarchy for disclosure of the inputs for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:
| ● | 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’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company, in estimating fair value for financial instruments, determined that the carrying amounts of cash and cash equivalents, trade receivables, short-term bank credit and trade payables are equivalent to, or approximate their fair value due to the short-term maturity of these instruments. The carrying amounts of variable interest rate long-term loans are equivalent or approximate to their fair value as they bear interest at approximate market rates. The liabilities held for sale as of December 31, 2020, included a long-term loan, that did not bear any interest, but taking into account the schedule of its maturities, its amount and the relatively low market rates, the difference between its carrying amount and its fair value was insignificant.
As of JuneSeptember 30, 2021, the Company held approximately $1,605$105 of short-term bank deposits (as of December 31, 2020 -2020- $105). As of JuneSeptember 30, 2021 and December 31, 2020, a short-termthis deposit in the amount of $105 has been pledged as security in respect of guarantees granted and cannot be pledged to others or withdrawn without the consent of the bank.
Derivatives
Embedded derivatives are separated from the host contract and carried at fair value when (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, standalone instrument with the same terms would qualify as a derivative instrument. The derivative is measured both initially and in subsequent periods at fair value, with changes in fair value charged to financial expenses, net. As to embedded derivatives arising from the issuance of convertible debentures, see Note 5. Transaction expenses related to the embedded derivatives are recognized as financial expenses at the date of the initial recognition.
F-27
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 –- Equity
| A. | Share capital |
| 1. | On December 23, 2019, the Company entered into a share purchase agreement (the “Agreement”) with Ivy and two other investors (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 proceeds of $1,092 and $208, respectively. Under the term of the Agreement and following the issuance of those shares, the Company appointed one representative to its Board of Directors (the “Board”), designated by Ivy. Also, pursuant to the Agreement, Ivy has a right to purchase any future equity securities offered by the Company, except with respect to certain exempt issuances as set forth in the Agreement.
The issuance of the remaining 6,000,000 ordinary shares (the “Subsequent Closing”) for aggregate gross proceeds of $1,200 took place in April 2020, following the approval by the Company’s shareholders on April 14, 2020, of the resolutions detailed below, that were required for the consummation of the Subsequent Closing under the Agreement and the applicable law: (i) an increase in the number of the ordinary shares authorized for issuance from 50,000,000 to 100,000,000; (ii) the issuance of the ordinary shares to Ivy following which Ivy will hold 25% or more of the total voting rights at general meetings of the shareholders of the Company; and (iii) the election of the representative designated by Ivy to the Board.
The issuance costs were approximately $31, $8 and $111 during the three months ended June 30, 2020, March 31, 2020, and December 31, 2019, respectively.
In addition, pursuant to the terms of the Agreement, on May 5, 2020, after the consummation of the Subsequent Closing, the Board appointed an additional representative designated by Ivy. The appointment of such designee shall remain valid through the next general meeting of the Company’s shareholders or as set forth in the Articles of Association of the Company.
| 2. | During the second quarter of 2021 the Company conducted a rights offering (the “Rights Offering”), under which the Company offered its shareholders the ability to exercise subscription rights and purchase, for every subscription right held by them as of April 14, 2021 (i.e. the record date), one Ordinary Share of the Company, at a purchase price of $0.174 per share. |
The Rights Offering was concluded on May 19, 2021 and was oversubscribed. Accordingly, the Company issued an aggregate of 18,965,516 Ordinary Shares (the “Issued Shares”) for aggregate gross proceeds to the Company of $3,300. The Issued Shares included 10,869,304 shares that were issued to Ivy and its affiliates, upon exercise of its basic subscription rights and over-subscription rights. Following the Rights Offering, Ivy and its affiliates own 35.9% of issued and outstanding share capital as of JuneSeptember 30, 2021.
The issuance costs derived from the Rights Offering were approximately $128.
| 3. | Two shareholders, including Ivy, |
F-28
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 –- Equity (cont’d)
| B. | Stock option plans |
During each of the sixnine month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, 640,000670,000 and 814,000 options were granted, respectively. The vesting period for the options is three years. The average exercise prices for the options that were granted during the sixnine months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 are $0.23 and $0.24, respectively. Those options expire up to five years after the date of grant. Any options which are forfeited or cancelled before expiration become available for future grants under the Company’s option plan. The fair value of each option granted to employees during the sixnine months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
| Six months ended June 30, | Nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Expected volatility | 113 | % | 107 | % | 114 | % | 107 | % | ||||||||
| Risk-free interest rate | 0.17 | % | 0.36 | % | 0.18 | % | 0.36 | % | ||||||||
| Expected life - in years | 2.50 | 2.49 | 2.50 | 2.49 | ||||||||||||
| 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 is based on the U.S. Treasury yield curve in effect at the time of grant. |
| 4. | Estimated expected lives are based on historical grants data. |
The Company’s options activity (including options to non-employees) and options outstanding and options exercisable as of December 31, 2020 and JuneSeptember 30, 2021, are summarized in the following table:
| Number of | Weighted | |||||||||||||||
| options | average exercise | |||||||||||||||
| Number of options outstanding | Weighted average exercise price per share | outstanding | price per share | |||||||||||||
| Outstanding – December 31, 2020 | 1,443,333 | $ | 0.54 | 1,443,333 | $ | 0.54 | ||||||||||
| Options granted | 640,000 | 0.23 | 670,000 | 0.23 | ||||||||||||
| Options expired or forfeited | (117,000 | ) | 0.72 | (132,833 | ) | 0.74 | ||||||||||
| Outstanding – June 30, 2021 | 1,966,333 | 0.43 | ||||||||||||||
| Outstanding – September 30, 2021 | 1,980,500 | 0.42 | ||||||||||||||
| Exercisable as of: | ||||||||||||||||
| December 31, 2020 | 681,330 | $ | 0.83 | 681,330 | $ | 0.83 | ||||||||||
| June 30, 2021 | 714,346 | $ | 0.74 | |||||||||||||
| September 30, 2021 | 734,346 | $ | 0.72 | |||||||||||||
The weighted average fair value of options granted during the sixnine months ended JuneSeptember 30, 2021 and during the sixnine months ended JuneSeptember 30, 2020 is $0.14 and $0.12, respectively, per option. The aggregate intrinsic value of outstanding options as of JuneSeptember 30, 2021 and December 31, 2020 is approximately $65$10 and $5, respectively. The aggregate intrinsic value of exercisable options as of JuneSeptember 30, 2021 and December 31, 2020 $12$3 and $2, respectively.
F-29
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 –- Equity (cont’d)
B. Stock option plans (cont’d)
The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of JuneSeptember 30, 2021:
| Options outstanding | Options exercisable | |||||||||||||||||||||||
| Range of exercise price ($) | Number Outstanding as of June 30, 2020 | Weighted average remaining contractual life (years) | Weighted Average Exercise Price | Number Outstanding As of June 30, 2020 | Weighted average remaining contractual life (years) | Weighted Average Exercise Price | ||||||||||||||||||
| 0.20-0.90 | 1,610,333 | 3.95 | 0.27 | 358,346 | 3.45 | 0.35 | ||||||||||||||||||
| 1.07-1.22 | 356,000 | 0.85 | 1.13 | 356,000 | 0.85 | 1.13 | ||||||||||||||||||
| 1,966,333 | 3.39 | 714,346 | 2.16 | |||||||||||||||||||||
| Options outstanding | Options exercisable | |||||||||||||||||||||||||
| Number | Weighted | Number | Weighted | |||||||||||||||||||||||
| Outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||||
| as of | remaining | Average | As of | remaining | Average | |||||||||||||||||||||
| Range of | September 30, | contractual | Exercise | September 30, | contractual | Exercise | ||||||||||||||||||||
| exercise price($) | 2021 | life (years) | Price | 2021 | life (years) | Price | ||||||||||||||||||||
| 0.20-0.84 | 1,634,500 | 3.73 | 0.27 | 388,346 | 3.20 | 0.35 | ||||||||||||||||||||
| 1.07-1.22 | 346,000 | 0.62 | 1.14 | 346,000 | 0.62 | 1.14 | ||||||||||||||||||||
| 1,980,500 | 3.18 | 734,346 | 1.99 | |||||||||||||||||||||||
As of JuneSeptember 30, 2021, there was approximately $153$142 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 1.411.30 years.
During the three months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, the Company recorded stock-based compensation expenses in the amount of $15 and $16,$13, respectively, in accordance with ASC 718, Compensation-Stock Compensation.“Compensation-Stock Compensation”.
During the sixnine months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, the Company recorded stock-based compensation expenses in the amount of $29$44 and $28,$41, respectively, in accordance with ASC 718, Compensation-Stock Compensation.“Compensation-Stock Compensation”.
| C. | Stock options, including shares that |
| D. |
The Company does not plan to issue any additional securities under its 2001 Stock Option Plan. The company plans to offer employees that were granted options as part of the 2001 Stock Option Plan, the opportunity to forfeit their outstanding options, as mentioned in Note 10B, in exchange for the grant of restricted shares to be granted in accordance with the Equity Incentive Plan.
F-30
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 11 - Operating segments
For the purposes of allocating resources and assessing performance in order to improve profitability, the Company’s chief operating decision maker (“CODM”) examines 2 segments which are the Company’s strategic business units: (1) Retail, and (2) Petroleum.
Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.
| Three months ended June 30, 2021 | Three months ended September 30, 2021 | |||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Revenues | $ | 2,179 | $ | 672 | $ | 2,851 | $ | 4,515 | $ | 524 | $ | 5,039 | ||||||||||||
| Reportable segment gross profit (**) | 587 | 400 | 987 | 1,085 | 247 | 1,332 | ||||||||||||||||||
| Reconciliation of reportable segment | ||||||||||||||||||||||||
| gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (9 | ) | (7 | ) | ||||||||||||||||||||
| Stock-based compensation | (1 | ) | (1 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 977 | $ | 1,324 | ||||||||||||||||||||
| Three months ended June 30, 2020 (*) | Three months ended September 30, 2020 (*) | |||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Revenues | $ | 3,556 | $ | 481 | $ | 4,037 | $ | 2,231 | $ | 755 | $ | 2,986 | ||||||||||||
| Reportable segment gross profit (**) | 1,425 | 264 | 1,689 | 852 | 309 | 1,161 | ||||||||||||||||||
| Reconciliation of reportable segment | ||||||||||||||||||||||||
| gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (9 | ) | (8 | ) | ||||||||||||||||||||
| Stock-based compensation | (1 | ) | (1 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 1,679 | $ | 1,152 | ||||||||||||||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
| (**) | Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation. |
F-31
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 11 - Operating segments (cont’d)
| Six months ended June 30, 2021 | Nine months ended September 30, 2021 | |||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Revenues | $ | 4,461 | $ | 1,159 | $ | 5,620 | $ | 8,976 | $ | 1,683 | $ | 10,659 | ||||||||||||
| Reportable segment gross profit (**) | 1,766 | 633 | 2,399 | 2,851 | 880 | 3,731 | ||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||
| Reconciliation of reportable segment | ||||||||||||||||||||||||
| gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (17 | ) | (24 | ) | ||||||||||||||||||||
| Stock-based compensation | (2 | ) | (3 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 2,380 | $ | 3,704 | ||||||||||||||||||||
| Six months ended June 30, 2020 (*) | Nine months ended September 30, 2020 (*) | |||||||||||||||||||||||
| Retail | Petroleum | Total | Retail | Petroleum | Total | |||||||||||||||||||
| Revenues | $ | 6,425 | $ | 1,279 | $ | 7,704 | $ | 8,655 | $ | 2,035 | $ | 10,690 | ||||||||||||
| Reportable segment gross profit (**) | 2,758 | 587 | 3,345 | 3,610 | 896 | 4,506 | ||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||
| Reconciliation of reportable segment | ||||||||||||||||||||||||
| gross profit to gross profit for the period | ||||||||||||||||||||||||
| �� | ||||||||||||||||||||||||
| Depreciation | (18 | ) | (26 | ) | ||||||||||||||||||||
| Stock-based compensation | (2 | ) | (3 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 3,325 | $ | 4,477 | ||||||||||||||||||||
| (*) | Reclassified to conform with the current period presentation, see Note 1C(2). |
| (**) | Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 12 –- Balances and transactions with related parties
Regarding balances and transactions with a related party, Ivy, a controlling shareholder, during the reporting period, see Notes 5 and 10A.
Note 13 – Subsequent events
The Company does not plan to issue any additional securities under its 2001 Stock Option Plan. The company plans to offer employees that were granted with options, as part of the 2001 Stock Option Plan, to forfeit their outstanding options, as mentioned in Note 10B, in exchange for grant of RSU to be granted in accordance with the Equity Incentive Plan.
F-32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward - Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, or Quarterly Report, that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “intends,” “plans”, “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any actual future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements may appear in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report and include, among other statements, statements regarding the following:
| ● | our ability to continue as a going concern and any efforts that we may undertake to support our future operations, service our debt obligations and to further execute our business plans; |
| ● | the results of our negotiations with Mr. Ivy, the controlling shareholder of the Company, with respect to the terms of a loan agreement that would address our cash needs; |
| ● | any impact of the Corona Virus, or COVID-19, pandemic on our business and cash flow, including timing of receipt of orders, revenue recognition, payment from our customers and gross margin; |
| ● | future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers; |
| ● | future costs and expenses and adequacy of capital resources; |
| ● | our expectations regarding our short-term and long-term capital requirements and satisfaction thereof; |
| ● | the impact of ongoing litigation on our business; |
| ● | interest from current and new customers and rate or orders |
| ● | the global shortage in components and the related effects of an increase in components’ prices, freight cost and longer lead-times; |
| ● | our outlook for the coming months; and |
| ● | plans and strategies for our business. |
The factors discussed herein and 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.
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, 2020 filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
2
As used in this Quarterly Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track Innovations Ltd. and our subsidiaries, unless otherwise indicated or as otherwise required by the context.
All figures in this Quarterly Report are stated in United States dollars, unless otherwise specified herein.
Overview
Overview
We are a leading developer of contactless payment solutions, Near Field Communication (NFC) technology based, for the unattended market. We have been a technology leader since 1990, providing systems, devices and services to operators and integrators with solutions and components that are simple to implement.
To date, we have deployed over one million payment solutions to our focused unattended markets: self-service kiosk, micro-markets and vending machines, entertainment and gaming, automated teller machines, Mass Transit Ticketing Validation and fuel payments.
We operate through regional offices, supporting clients and payment industry partners with its unique contactless payment solutions.
On April 21, 2021, we sold our Polish subsidiary, ASEC S.A., or ASEC, including our Mass Transit Ticketing activity in Poland. The consideration for the sale of ASEC was agreed to equal $3 million, of which approximately $2.1 million was used to repay Polish bank loans, and which was reduced by an agreed amount of approximately $300,000 due to working capital adjustments. Following this sale, we operate in two segments: (1) Retail, and (2) Petroleum.
In addition, we engaged an investment bank to explore strategic options and are investing resources in this process.
This discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained in “Item 1. Financial Statements” of this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC.
Results of Operations
Discontinued operations. In April 2021, we completed the sale of 100% of the issued and outstanding share capital of ASEC. ASEC is headquartered in Krakow, Poland and had been conducting our Mass Transit Ticketing business in Poland (which was attributed to our “Retail and Mass Transit Ticketing” segment). In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division. Accordingly, the results and the cash flows from such operations for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. All the data in this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those discontinued operations.
Three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020
Sources of Revenue
We have historically derived a substantial majority of our revenues from the sale of our products, including both complete systems and original equipment manufacturer components, and, less significantly, from engineering services, customer services and technical support. support. In addition, we have derived revenues from Software as a Service, or SaaS. During the three months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, the revenues that we derived from those sources were as follows (in thousands):
Three months ended June 30, | Three months ended | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Sales | $ | 2,446 | $ | 3,751 | $ | 4,632 | $ | 2,624 | ||||||||
| SaaS | $ | 405 | $ | 286 | $ | 407 | $ | 362 | ||||||||
| Total revenues | $ | 2,851 | $ | 4,037 | $ | 5,039 | $ | 2,986 | ||||||||
3
Sales.Sales decreasedincreased by $1.3$2 million, or 35%77%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020. The decreaseincrease is mainly attributed to an increase of Retail segment sales in the Americas and to a decreaselesser degree to an increase of Retail segment sales in the Asia-Pacific region, or APAC, and Europe, partially offset by an increasea decrease in Petroleum segment sales in Americas and Africa.
SaaS.SaaS revenues include monthly payments for a set of different software applications such as Terminal Management Systems, Payment gateway, and other software applications for the Retail segment, and a separate set of applications for fuel management systems supporting the Petroleum segment. Our SaaS revenues increased by $119,000,$45,000, or 42%12%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020. The increase is mainly attributed to an increase in revenues in both our segments, mainly in our Retail segment and our Petroleum segment.
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 JuneSeptember 30, 2021 and JuneSeptember 30, 2020:
| Three months ended June 30, | Americas | Europe | Africa | APAC | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Americas | Europe | Africa | APAC | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | $ | 824 | 29 | % | $ | 1,174 | 41 | % | $ | 451 | 16 | % | $ | 402 | 14 | % | $ | 2,892 | 58 | % | $ | 1,324 | 26 | % | $ | 313 | 6 | % | $ | 510 | 10 | % | ||||||||||||||||||||||||||||||||
| 2020 | $ | 810 | 20 | % | $ | 1,328 | 33 | % | $ | 237 | 6 | % | $ | 1,662 | 41 | % | $ | 1,055 | 35 | % | $ | 1,265 | 42 | % | $ | 410 | 14 | % | $ | 256 | 9 | % | ||||||||||||||||||||||||||||||||
Our revenues from sales in the Americas increased by $1.8 million, or 174%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, remained consistent.mainly due to an increase in Retail segment sales, partially offset by a decrease in Petroleum segment sales.
Our revenues from sales in Europe decreasedincreased by $154,000,$59,000, or 12%5%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, mainly due to an increase in Retail segment revenues.
Our revenues from sales in Africa decreased by $97,000, or 24%, in the three months ended September 30, 2021, compared to the three months ended September 30, 2020, mainly due to a decrease in RetailPetroleum segment sales.
Our revenues from sales in AfricaAPAC increased by $214,000,$254,000, or 90%99%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, mainly due to an increase in revenues from the Petroleum segment.Retail segment revenues.
Our revenues from sales in APAC decreased by $1.3 million, or 76%, in the three months ended June 30, 2021, compared to the three months ended June 30, 2020, mainly due to a decrease in Retail sales.
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
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 JuneSeptember 30, 2021 and JuneSeptember 30, 2020:
| Three months ended June 30, | Retail | Petroleum | ||||||||||||||||||||||||||||||
| Three months ended September 30, | Retail | Petroleum | ||||||||||||||||||||||||||||||
| 2021 | $ | 2,179 | 76 | % | $ | 672 | 24 | % | $ | 4,515 | 90 | % | $ | 524 | 10 | % | ||||||||||||||||
| 2020 | $ | 3,556 | 88 | % | $ | 481 | 12 | % | $ | 2,231 | 75 | % | $ | 755 | 25 | % | ||||||||||||||||
4
Our revenues from Retail in the three months ended JuneSeptember 30, 2021 decreasedincreased by $1.4$2.3 million, or 39%102%, compared to the three months ended JuneSeptember 30, 2020, mainly attributed to a decreasean increase in Retail sales in the Americas and to a lesser degree to an increase in sales in APAC and European markets.market.
Our revenues from Petroleum in the three months ended JuneSeptember 30, 2021 increaseddecreased by $191,000,$231,000, or 40%31%, compared to the three months ended JuneSeptember 30, 2020, mainly due to an increasea decrease in revenues from the Petroleum segment in the Americas and Africa.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, in the three months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 were as follows (dollar amounts in thousands):
| Cost of revenues | Three months ended June 30, | Three months ended September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Cost of sales | $ | 1,874 | $ | 2,358 | $ | 3,715 | $ | 1,834 | ||||||||
| Gross profit | $ | 977 | $ | 1,679 | $ | 1,324 | $ | 1,152 | ||||||||
| Gross margin percentage | 34 | % | 42 | % | 26 | % | 39 | % | ||||||||
Cost of sales. Cost of sales consists primarily of materials, as well as salaries, fees to subcontractors, related costs of our technical staff that assemble our products and freight expenses. The decreaseincrease of $484,000,$1.9 million, or 20%103%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, resulted primarily from an increase in sales and an increase of components costs due to a decrease in sales.global components shortage as a result of the COVID-19 pandemic.
Gross margin. The decrease in gross margin in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, is mainly attributed to an increase of components costs due to a global shortage of components shortage as part of the impact of the COVID-19 pandemic and in lesser degree due to revenue mix.pandemic.
Operating expenses
Our operating expenses in the three months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 were as follows (in thousands):
| Operating expenses | Three months ended June 30, | Three months ended September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Research and development | $ | 900 | $ | 903 | $ | 946 | $ | 839 | ||||||||
| Selling and marketing | $ | 736 | $ | 885 | $ | 701 | $ | 765 | ||||||||
| General and administrative | $ | 735 | $ | 698 | $ | 764 | $ | 799 | ||||||||
| Total operating expenses | $ | 2,371 | $ | 2,486 | $ | 2,411 | $ | 2,403 | ||||||||
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. Our research and development,The increase of $107,000, or 13%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, remained consistent.is primarily attributed to recruitment of new employees and an increase in subcontracting expenses.
Selling and marketing. Our selling and marketing expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing for the subsidiaries and offices in the United States, South Africa and Europe, as well as expenses related to advertising, professional expenses,, participation in exhibitions and tradeshows and a change in allowance for doubtful accounts. The decrease of $149,000,$64,000, or 17%8%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, is primarily attributed to a decrease in employment expenses and professional expenses.
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General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive management and financial and administrative staff. These expenses also include costs of our professional advisors (such as legal and accounting), office expenses and insurance. The increasedecrease of $37,000,$35,000, or 5%4%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, is primarily attributed to an increase in professional expenses, partially offset by a decrease in employmentprofessional expenses.
Financing expenses, net
Our financing expenses, net, in the three months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 were as follows (in thousands):
| Three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Financing expenses, net | $ | (131 | ) | $ | (109 | ) | ||
| Three months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Financial expenses deriving from a convertible short-term loan from shareholders | $ | (345 | ) | $ | - | |||
| Other financial expenses, net | $ | (112 | ) | $ | (72 | ) | ||
| Financing expenses, net | $ | (457 | ) | $ | (72 | ) | ||
Financing expenses consist primarily of interest payable on loans, bank commissions, and foreign exchange losses.losses and financial expenses deriving from a convertible short-term loan, or the Loan, incurred in accordance with the terms of a loan financing agreement, as amended on January 26, 2021, or the Loan Agreement, we entered into with Jerry L. Ivy, Jr., Descendants’ Trust, or the Lead Lender, and another lender. Financing income consists primarily of foreign exchange gains and interest earned on investments in short-term deposits. The increase in financing expenses, net, of $22,000,$385,000, or 20%535%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, is mainly due to interestnon-cash financial expenses asderived from the Loan, and to a result of a convertible loanlesser degree from shareholders.exchange rate differential.
Net loss from continuing operations
Our net loss from continuing operations in the three months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 was as follows (in thousands):
| Three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from continuing operations | $ | (1,525 | ) | $ | (928 | ) | ||
| Three months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from continuing operations | $ | (1,544 | ) | $ | (1,315 | ) | ||
The increase in the net loss from continuing operations of $597,000,$229,000, or 64%17%, in the three months ended JuneSeptember 30, 2021, compared to the three months ended JuneSeptember 30, 2020, is mainly due to an increase in non-cash financing expenses derived from the Loan, partially offset by an increase in our gross profit, as described above.
Net income (loss) from discontinued operations
Our net income (loss) from discontinued operations in the three months ended September 30, 2021 and September 30, 2020 was as follows (in thousands):
| Three months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income (loss) from discontinued operations | $ | 29 | $ | (306 | ) | |||
6
Our net income (loss) from discontinued operations for the reporting periods is presented in the statements of operations as discontinued operations separately from continuing operations. The change in the net income (loss) from discontinued operations of $335,000 in the three months ended September 30, 2021, compared to the three months ended September 30, 2020, is mainly due to the fact that in 2020, we suffered a loss from the Mass Transit Ticketing operations as a result of the impact of the COVID-19 pandemic, which was sold when we sold ASEC, including its Mass Transit Ticketing operation, in April 2021.
Net loss
Our net loss in the three months ended September 30, 2021 and September 30, 2020 was as follows (in thousands):
| Three months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (1,515 | ) | $ | (1,621 | ) | ||
The decrease in net loss of $106,000 or 7%, in the three months ended September 30, 2021, compared to the three months ended September 30, 2020, is mainly due to an increase in our gross profit and a decrease in our gross profit,loss from discontinued operations, partially offset by an increase in non-cash financing expenses derived from the Loan, as described above.
7
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
Sources of Revenue
During the nine months ended September 30, 2021 and September 30, 2020, our revenues were as follows (in thousands):
Nine months ended | ||||||||
| 2021 | 2020 | |||||||
| Sales | $ | 9,465 | $ | 9,718 | ||||
| SaaS | $ | 1,194 | $ | 972 | ||||
| Total revenues | $ | 10,659 | $ | 10,690 | ||||
Sales. Sales decreased by $253,000 million, or 3%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The decrease is mainly attributed to a decrease of Petroleum segment sales in Americas. The Retail segment sales remained consistent due to an increase of sales in Americas, offset by a decrease of sales in APAC and Europe.
SaaS. Our SaaS revenues increased by $222,000, or 23%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase is mainly attributed to an increase in revenues of both our Retail segment and our Petroleum segment.
The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of revenues in different geographical areas, in the nine months ended September 30, 2021 and September 30, 2020:
| Nine months ended September 30, | Americas | Europe | Africa | APAC | |||||||||||||||||||||||||||||
| 2021 | $ | 4,590 | 43 | % | $ | 3,411 | 32 | % | $ | 1,132 | 11 | % | $ | 1,526 | 14 | % | |||||||||||||||||
| 2020 | $ | 3,620 | 34 | % | $ | 3,775 | 35 | % | $ | 1,164 | 11 | % | $ | 2,131 | 20 | % | |||||||||||||||||
Our revenues from sales in the Americas increased by $970,000, or 27%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, mainly due to an increase in Retail sales , partially offset by a decrease of Petroleum segment sales.
Our revenues from sales in Europe decreased by $364,000, or 10%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, mainly due to a decrease in Retail sales.
Our revenues from sales in Africa decreased by $32,000, or 3%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, mainly due to a decrease in Petroleum segment sales.
Our revenues from sales in APAC decreased by $605,000, or 28%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, mainly due to a decrease in Retail sales.
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
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The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the nine months ended September 30, 2021 and September 30, 2020:
| Nine months ended September 30, | Retail | Petroleum | |||||||||||||||
| 2021 | $ | 8,976 | 84 | % | $ | 1,683 | 16 | % | |||||||||
| 2020 | $ | 8,655 | 81 | % | $ | 2,035 | 19 | % | |||||||||
Our revenues from Retail in the nine months ended September 30, 2021 increased by $320,000, or 4%, compared to the nine months ended September 30, 2020, mainly attributed to an increase in Retail sales in Americas and an increase in Retail SaaS, partially offset by a decrease in Retail sales in APAC and Europe.
Our revenues in the nine months ended September 30, 2021 from Petroleum decreased by $351,000, or 17%, compared to the nine months ended September 30, 2020, mainly due to a decrease in sales of Petroleum products in the Americas.
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, 2021 and September 30, 2020 were as follows (dollar amounts in thousands):
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cost of sales | $ | 6,955 | $ | 6,213 | ||||
| Gross profit | $ | 3,704 | $ | 4,477 | ||||
| Gross margin percentage | 35 | % | 42 | % | ||||
Cost of sales. The increase of $742,000, or 12%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, resulted primarily from an increase in components costs due to a global components shortage as part of the impact of the COVID-19 pandemic, partially offset by a decrease that derives from changes in our revenue mix.
Gross margin. The decrease of gross margin percentage in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is mainly attributed to an increase of components costs due to a global components shortage as part of the impact of the COVID-19 pandemic, partially offset by changes in our revenue mix.
Operating expenses
Our operating expenses in the nine months ended September 30, 2021 and September 30, 2020 were as described above.follows (in thousands):
| Operating expenses | Nine months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| Research and development | $ | 2,684 | $ | 2,635 | ||||
| Selling and marketing | $ | 2,042 | $ | 2,348 | ||||
| General and administrative | $ | 2,245 | $ | 2,299 | ||||
| Total operating expenses | $ | 6,971 | $ | 7,282 | ||||
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Research and development. The increase of $49,000, or 2%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is primarily attributed to recruitment of new employees, partially offset by a decrease in subcontracting expenses.
Selling and marketing. The decrease of $306,000, or 13%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is primarily attributed to a decrease in employment expenses and professional expenses.
General and administrative. The decrease of $54,000, or 2%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is primarily attributed to a decrease in employment expenses, partially offset by an increase in professional expenses.
Financing expenses, net
Our financing expenses, net, in the nine months ended September 30, 2021 and September 30, 2020 were as follows (in thousands):
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Financial expenses derive from convertible short-term loan from shareholders | $ | (2,398 | ) | $ | - | |||
| Other financial expenses, net | $ | (160 | ) | $ | (5 | ) | ||
| Financing expenses, net | $ | (2,558 | ) | $ | (5 | ) | ||
The increase in financing expenses, net, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, of $2.6 million, is mainly due to non-cash financial expenses derived from the Loan, and to a lesser degree from exchange rate differential.
Net loss from continuing operations
Our net lossfrom continuing operations in the nine months ended September 30, 2021 and September 30, 2020 was as follows (in thousands):
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from continuing operations | $ | (5,812 | ) | $ | (2,819 | ) | ||
The increase in net loss from continuing operations of $3.0 million, or 106%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, is mainly due to an increase in non-cash financing expenses relating to the Loan, and to a lesser degree due to a decrease in gross profit that resulted primarily from an increase in components costs which derives from a global components shortage as part of the impact of the COVID-19 pandemic, partially offset by a decrease in operating expenses.
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Net loss from discontinued operations
Our net loss from discontinued operations in the threenine months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 was as follows (in thousands):
| Three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from discontinued operations | $ | (1,197 | ) | $ | (195 | ) | ||
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from discontinued operations | $ | (1,586 | ) | $ | (594 | ) | ||
Our net loss from discontinued operations for the reporting periods isare presented in the statements of operations as discontinued operations separately from continuing operations. The increase in the net loss from discontinued operations of $1.0 million, or 514%167%, in the threenine months ended JuneSeptember 30, 2021, compared to the threenine months ended JuneSeptember 30, 2020, is mainly due to classification in an amount of $746,000 of exchange differences on translation from other comprehensive loss to net loss from discontinued operations due to completion of sale of ASEC in the second quarter of 2021, and net expenses relating to the settlement of the litigation processes with Merwell Inc. and SuperCom Ltd.
Net loss
Our net loss in the three months ended June 30, 2021 and June 30, 2020 was as follows (in thousands):
| Three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (2,722 | ) | $ | (1,123 | ) | ||
The increase in net loss of $1.6 million or 143%, in the three months ended June 30, 2021, compared to the three months ended June 30, 2020, is mainly due to a decrease in our gross profit and an increase in net loss from discontinued operations, partially offset by a decrease in our operating expenses, as described above.
Six months ended June 30, 2021 compared to six months ended June 30, 2020
Sources of Revenue
During the six months ended June 30, 2021 and June 30, 2020, our revenues were as follows (in thousands):
Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Sales | $ | 4,833 | $ | 7,094 | ||||
| SaaS | $ | 787 | $ | 610 | ||||
| Total revenues | $ | 5,620 | $ | 7,704 | ||||
Sales. Sales decreased by $2.3 million, or 32%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The decrease is mainly attributed to a decrease of Retail segment sales in APAC, the Americas and Europe.
SaaS. Our SaaS revenues increased by $177,000, or 29%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The increase is mainly attributed to an increase in revenues of both our Retail segment and our Petroleum segment.
The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of revenues in different geographical areas, in the six months ended June 30, 2021 and June 30, 2020:
| Six months ended June 30, | Americas | Europe | Africa | APAC | ||||||||||||||||||||||||||||
| 2021 | $ | 1,698 | 30 | % | $ | 2,087 | 37 | % | $ | 819 | 15 | % | $ | 1,016 | 18 | % | ||||||||||||||||
| 2020 | $ | 2,565 | 33 | % | $ | 2,510 | 33 | % | $ | 754 | 10 | % | $ | 1,875 | 24 | % | ||||||||||||||||
Our revenues from sales in the Americas decreased by $867,000, or 34%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, mainly due to a decrease in sales of readers to the U.S. market.
Our revenues from sales in Europe decreased by $423,000, or 17%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, mainly due to a decrease in Retail sales.
Our revenues from sales in Africa increased by $65,000, or 9%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, mainly due to an increase in revenues of Petroleum segment.
Our revenues from sales in APAC decreased by $859,000, or 46%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, mainly due to a decrease in Retail sales.
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the six months ended June 30, 2021 and June 30, 2020:
| Six months ended June 30, | Retail | Petroleum | ||||||||||||||
| 2021 | $ | 4,461 | 79 | % | $ | 1,159 | 21 | % | ||||||||
| 2020 | $ | 6,425 | 83 | % | $ | 1,279 | 17 | % | ||||||||
Our revenues from Retail in the six months ended June 30, 2021 decreased by $2.0 million, or 31%, compared to the six months ended June 30, 2020, mainly attributed to a decrease in Retail sales in APAC, the United States and Europe.
Our revenues in the six months ended June 30, 2021 from Petroleum decreased by $120,000, or 9%, compared to the six months ended June 30, 2020, mainly due to a decrease in sales of Petroleum products in APAC and the Americas, partially offset by an increase in SaaS revenues of Petroleum in Africa.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, in the six months ended June 30, 2021 and June 30, 2020 were as follows (dollar amounts in thousands):
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cost of sales | $ | 3,240 | $ | 4,379 | ||||
| Gross profit | $ | 2,380 | $ | 3,325 | ||||
| Gross margin percentage | 42 | % | 43 | % | ||||
Cost of sales. The decrease of $1.1 million, or 26%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, resulted primarily from a decrease in sales.
Gross margin. the decrease of gross margin percentage in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is mainly attributed to an increase of components costs due to a components shortage as part of the impact of COVID-19 pandemic, partially offset by change in our revenue mix.
Operating expenses
Our operating expenses in the six months ended June 30, 2021 and June 30, 2020 were as follows (in thousands):
| Operating expenses | Six months ended June 30, | |||||||
| 2021 | 2020 | |||||||
| Research and development | $ | 1,738 | $ | 1,796 | ||||
| Selling and marketing | $ | 1,341 | $ | 1,583 | ||||
| General and administrative | $ | 1,481 | $ | 1,500 | ||||
| Total operating expenses | $ | 4,560 | $ | 4,879 | ||||
Research and development. The decrease of $58,000, or 3%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is primarily attributed to a decrease in subcontracting expenses, partially offset by an increase in employment expenses.
Selling and marketing. The decrease of $242,000, or 15%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is primarily attributed to a decrease in employment expenses and professional expenses.
General and administrative. The decrease of $19,000, or 1%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is primarily attributed to a decrease in employment expenses, partially offset by an increase in professional expenses.
Financing (expenses) income, net
Our financing (expenses) income, net, in the six months ended June 30, 2021 and June 30, 2020 were as follows (in thousands):
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Loss from change in fair value of embedded derivative | $ | (1,974 | ) | $ | - | |||
| Other financial (expenses) income, net | (127 | ) | $ | 67 | ||||
| Financing (expenses) income, net | (2,101 | ) | $ | 67 | ||||
The change in financing (expenses) income, net, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, of $2.2 million, is mainly due to a loss from change in the fair value of embedded derivative as a result of the convertible loan of $2.0 million and to a lesser degree from interest expenses as a result of loan from shareholders and exchange rate differential.
Net loss from continuing operations
Our net lossfrom continuing operations in the six months ended June 30, 2021 and June 30, 2020 was as follows (in thousands):
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from continuing operations | $ | (4,268 | ) | $ | (1,504 | ) | ||
The increase in net loss from continuing operations of $2.8 million, or 184%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is mainly due to a decrease in our sales, a decrease in our gross profit and an increase in our financing expenses, net, and due to a loss from change in fair value of embedded derivative, partially offset by a decrease in our operating expenses, as described above.
Net loss from discontinued operations
Our net loss from discontinued operations in the six months ended June 30, 2021 and June 30, 2020 was as follows (in thousands):
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss from discontinued operations | $ | (1,615 | ) | $ | (288 | ) | ||
Our net loss from discontinued operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The increase in the net loss from discontinued operations of $1.3 million, or 461%, in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is mainly due to classification in an amount of $746,000 of exchange differences on translation from other comprehensive loss to net loss from discontinued operations due to completion of sale of ASEC in the sixnine months ended on JuneSeptember 30, 2021, and net expenses relating to the settlement of the litigation processes with Merwell Inc. and SuperCom Ltd.
Net loss
Net loss
Our net loss in the sixnine months ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 was as follows (in thousands):
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (5,883 | ) | $ | (1,792 | ) | ||
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (7,398 | ) | $ | (3,413 | ) | ||
The increase in net loss of $4.1$4.0 million, or 283%117%, in the sixnine months ended JuneSeptember 30, 2021, compared to the sixnine months ended JuneSeptember 30, 2020, is primarilymainly due to an increase in non-cash financing expenses derived from the Loan, an increase in loss from discontinued operations and to a lesser degree due to a decrease in our gross profit that resulted primarily from an increase in our financing expenses, net, due tocomponents costs derived from a loss from change in fair valueglobal components shortage as part of embedded derivative and an increase in net loss from discontinued operations,the impact of the COVID-19 pandemic, partially offset by a decrease in our operating expenses, as described above.expenses.
Liquidity and Capital Resources
Our principal sources of liquidity since our inception have been revenues, proceeds from sales of equity securities, borrowings from banks, governments and shareholders, including convertible loans, proceeds from the exercise of options and warrants as well as proceeds from the divestiture of parts of our businesses.Webusinesses. We have had recurring losses and cash outflows from operating activities. As of JuneSeptember 30, 2021, we had cash and cash equivalents and short-term investments representing bank deposits of $2.6 million (of which an amount of $105,000 has been pledged as security for certain items).$1.3 million.
The recent situation in Poland resulting from the COVID-19 pandemic led to an almost complete stop to our Mass Transit Ticketing sales business, which negatively impacted our cash flow since March 2020. On April 21, 2021, we completed the sale of our wholly owned Polish subsidiary, ASEC, including our Mass Transit Ticketing activity. The consideration for the sale of ASEC was agreed to equal $3 million, of which approximately $2.1 million was used to repay Polish bank loans and was reduced by approximately $300,000 due to working capital adjustments.
We raised additional funds and increased our cash, cash equivalents and long-term investments in a gross amount of $3.3 million by closing a rights offering, or the Rights Offering, on May, 19, 2021, under which we offered our existing shareholders to purchase additional ordinary shares in consideration for a lower exercise price than the quoted share price in the active market, reflecting a bonus element that is somewhat similar to a stock dividend. The Rights Offering was oversubscribed and generated $3.3 million in gross proceeds. The issuance costs derived for the Rights Offering were approximately $128,000. As part of the Rights Offering we issued an aggregate of 18,965,516 shares for $0.174 per share.
11
On December 9, 2020, and January 2021, we entered into a loan financing agreement, or the Loan Agreement, with Jerry L. Ivy, Jr., Descendants’ Trust, or the Lender. TheLead Lender who is our controlling shareholder. The Loan Agreement was amended on January 26, 2021, to allow for an additional lender to join the Lead Lender and lend an additional $100,000 and provides that the Lead Lender and the additional lender will extend us a loan in the aggregate amount of up to $1,600,000, or the Loan Amount. The Loan Agreement, before it was amended, was further described in the Current Report on Form 8-K filed by the Company on December 15, 2020. The Loan Agreement provides, among other things, that the Loan Amount and all accrued interest, or the Secured Amount, matures upon the lapse of six months following the initial closing, i.e., on June 17, 2021, or the Maturity Date, and will be payable in full on the Maturity Date, provided that the maturity date can be extended, in respect of the Loan Amount, at the sole option of the majority of the lenders. On June 17, 2021, the Lead Lender, being the majority of the lenders, exercised its option to extend the maturity date, and the parties entered into a notice of exercise of option and agreement, or the Extension Agreement, according to which the maturity date was extended until December 17, 2021, or the Extended Maturity Date, and the Extended Maturity Period, as applicable. The Loan Amount has been bearing interest on all outstanding principal at an interest rate of 8.0% per annum. The net amount of interest on the Loan Amount accrued through June 17, 2021 was $54,849, or the Interest Debt. Pursuant to the Extension Agreement, the interest rate will automatically increase, effective as of the Maturity Date, to the rate of 10.0% per annum, or the Extension Interest. Any payment of interest is subject to withholding of taxes at source and the interest rates mentioned above are net of such withholding. Under the Extension Agreement, it was agreed that the Interest Debt shall be payable on the Extended Maturity Date, while until then it shall be considered part of the Loan Amount and shall bear the Extension Interest rate. In the event of a conversion of the Loan amount, the Interest Debt shall convert into our ordinary shares at the conversion price of $0.174 per share, and the remaining Secured Amount shall be converted at a price per share of $0.124, as originally contemplated under the Loan Agreement. As of September 30, 2021, the Secured Amount was $1,702,455, out of which $102,455 were accrued interest expenses.
Our management hasSince the extension of the date of repayment of the Loan Amount from June 17, 2021 to the Extended Maturity Date, we have been working on updating our strategy forwith the coming yearsLead Lender, to either convert the Loan Amount to equity or further extend the repayment date of the Loan Amount in order to realizecontinue to advance our potentialgoals and resumemeet our growth, and ultimately create shareholder value.projections. We raised additional funds and increasedare still working through this matter, but given the proximity to the Extended Maturity Date, we are uncertain regarding the likelihood of achieving either of these two alternatives. We believe that if the Loan Amount is paid in December without further fund raising or other increase our cash, cash equivalents and short-term investments in a gross amount of $3.3 million by closing a rights offering, or the Rights Offering, on May, 19, 2021, under which we offeredwill not have sufficient resources to enable us to continue our existing shareholders to purchase additional ordinary shares in considerationoperations for a lower exercise price than the quoted share price in the active market, reflecting a bonus element that is somewhat similar to a stock dividend. The Rights Offering was oversubscribed and generated $3.3 million in gross proceeds. The issuance costs derived for the Rights Offering were approximately $128,000. As partperiod of the Rights Offering we issued an aggregate of 18,965,516 shares for $0.174 per share. In addition to the above, a portion of additional revenue we were hoping to recognize in the second quarter has become backlogged due to a lack of components, as further described below, and will be delivered later in the year. Therefore, we believe that we have sufficient capital resources to fund our operations for at least the next 12 months. In addition, we engaged an investment bankAs a result, there is a substantial doubt regarding our ability to explore strategic optionscontinue as a going concern. We are attempting to raise additional funds and are investing resourcesto increase our cash by negotiating with the Lead Lender, that would address our cash needs. While our management believes in this process.
our ability to raise additional funds and increase our cash, there can be no assurances to that effect.
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 includehave included working from home where possible, minimizing face-to-face meetings, utilizing video conference as much as possible, social distancing at facilities and elimination of most international travel. We continue to comply with all local health directives.
We have continued to see an interest from new customers, potential customers and partners as they forecasted that the need for our products will grow, yet execution of closing is still slow due to the current business environment.
While interest from current and new customers is growing, which is reflected in an increasing rate of orders, a global shortage in components, which caused an increase in components’ prices, freight cost and longer lead-times, has created a delay in fulfilling customers’ orders, which impacted our revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, we encourage our customers to provide their forecast for their demand and continue to maintain a comprehensive network of worldwide suppliers in order to optimize our access to critical components. In addition, we recently purchased an amount of such components to be used for sales later this year.year and in the beginning of 2022. As long as the COVID-19 pandemic continues, the components’ lead-time may be longer than normal and the global shortage in components may continue or get worse.
It is difficult to predict what other impacts the COVID-19 pandemic may have on us.
Operating activities related to continuing operations
For the sixnine months ended JuneSeptember 30, 2021, net cash used in continuing operating activities was $3.2$5.4 million, primarily due to a $4.3$5.8 million net loss from continuing operations, a $1.1$2.8 million increase in trade receivables, net, a $416,000$750,000 increase in inventories, a $420,000 increase in other receivables and prepaid expenses, a $263,000 increase in inventories, a $55,000$110,000 change in accrued interest and linkage differences and $13,000 of deferred tax benefits, net, partially offset by $2.4 million of financial expenses derived from the Loan, a $2.0$1.7 million loss from change in fair value of embedded derivative, a $544,000 increase in trade payables, $200,000$290,000 of depreciation and amortization, a $173,000$58,000 increase in other current liabilities, $29,000$44,000 of expenses due to stock-based compensation issued to employees and others, $10,000 of transaction expenses related to the convertible short-term loan received from shareholders and a $5,000$17,000 change in accrued severance pay, net.
For the sixnine months ended JuneSeptember 30, 2020, net cash used in continuing operating activities was $33,000$1.6 million, primarily due to a $1.5$2.8 million net loss from continuing operations, a $283,000$432,000 million increase in trade payables, a $305,000 decrease in other current liabilities, and a $162,000$102,000 change in accrued interest and linkage differences, partially offset by a $1.1 million increase in trade receivables, $314,000 of depreciation and amortization, a $92,000 increase$306,000 decrease in other receivables and prepaid expenses, partially offset by a $1.3 million increase in trade payables, a $380,000$253,000 decrease in inventories, $212,000 of depreciation and amortization, a $92,000 decrease in trade receivables, net, $28,000$41,000 of expenses due to stock based compensation issued to employees, $17,000 of deferred tax expenses, net, and a $11,000$21,000 change in accrued severance pay, net.net, and $9,000 of deferred tax expenses,
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Operating activities related to discontinued operations
For the sixnine months ended JuneSeptember 30, 2021, net cash used in discontinued operating activities was $91,000,$1.7 million, mainly related to the Mass Transit Ticketing operation that was managed by ASEC, and legal expenses relateda payment of $1.8 million to the dispute with Merwell Inc. and SuperCom Ltd. in connection with the SmartID division., as part of a settlement agreement.
For the sixnine months ended JuneSeptember 30, 2020, net cash used in discontinued operating activities was $1.3 million, mainly related to the Mass Transit Ticketing operation that was managed by ASEC and to expenses derived from legal proceedings with Harel Insurance Company Ltd.
Investing and financing activities related to continuing operations
For the sixnine months ended JuneSeptember 30, 2021, net cash used in continuing investing activities was $1.6 million, mainly due to a $1.5 million change in short-term investments, and $137,000$206,000 of purchases of property and equipment and intangible assets.
For the sixnine months ended JuneSeptember 30, 2020, net cash provided by continuing investing activities was $228,000,$1.4 million, mainly due to a $511,000$1.7 million change in short-term investments, net, partially offset by $283,000$336,000 of purchases of property and equipment and intangible assets.
For the sixnine months ended JuneSeptember 30, 2021, net cash provided by continuing financing activities was $2.7$3.7 million, mainly due to $3.2 million in proceeds from issuance of shares as a result of the Rights Offering, net of issuance costs, and a $923,000 convertible short-term loan received from shareholders, net of transaction expenses, and a $18,000 long-term loan received, partially offset by a $1.5 million$406,000 decrease in short-term bank credit and loans, net, and a $2,000$4,000 repayment of long-term bank loans.
For the sixnine months ended JuneSeptember 30, 2020, net cash provided by continuing financing activities was $1.4 million, mainly due to $1.4 million of proceeds from issuance of shares, net of issuance costs, and a $62,000$70,000 increase in short-term bank credit and loans, net, partially offset by a $7,000$8,000 of repayment of long-term bank loans.
Investing and financing activities related to discontinued operations
For the sixnine months ended JuneSeptember 30, 2021, net cash provided by discontinued investing activities was $1.3$2.9 million, mainly related to $1.6 million derived from a settlement with SuperCom Ltd., including earn-out consideration, and $2.7 million consideration for the sale of ASEC, partially offset by cash and cash equivalents as held by ASEC at the closing date of its sale.
For the sixnine months ended JuneSeptember 30, 2020, net cash used in discontinued investing activities was $207,000,$658,000, related to the purchase of long-lived assets for the Mass Transit Ticketing operations.
For the sixnine months ended JuneSeptember 30, 2021, net cash used in discontinued financing activities was $380,000, related to repayment of short-term bank loan, for the Mass Transit Ticketing operations.
For the sixnine months ended JuneSeptember 30, 2020, net cash provided by discontinued financing activities was $799,000,$890,000, related to proceeds from long-term bank loan for the Mass Transit Ticketing operations.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - Our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was made known to our management, including our CEO and CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of JuneSeptember 30, 2021. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective as of such date.
Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the quarter ended JuneSeptember 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
For information with respect to legal proceedings to be disclosed under this Item, see Note 6A to the consolidated Financial Statements included under Part I Item 1 in this Quarterly Report.
Item 1A. Risk Factors.
Our business faces many risks, a number of which are described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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 that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 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, 2020 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.
We face risks due to a global shortage in the components required for the supply of our products.
As part of the different impacts of the COVID 19 pandemic, there currently ishas been a global shortage in various components, including in the components required for the supply of our products, which has led to an increase in the prices of such components, in freight cost and to a longer lead-times. Such shortage can makehas made it harder for us to be able to fulfill orders made by customers, which might have an impactimpacted on our revenues and product gross margin, mainly in the Retailretail segment. In order to mitigate the risk, we encourage our customers to provide a forecast to their demand and continue to maintain a comprehensive network of worldwide suppliers in order to optimize our access to critical components. In addition, during last few months we have purchased a larger amount of such components to be used for sales later this year. However, these measures may not be sufficient to mitigate the aforementioned risks.risks, and if the shortage continues, or even worsens, this may adversely impact our business. As long as the COVID-19 pandemic continues, the components’ lead-time may be longer than normal and shortage in components may continue or become greater which would adversely affect our business.
Item 5. Other Information.We do not have enough cash resources to fund our operations for the next twelve months and if we are unable to secure additional capital, we may be required to seek strategic alternatives, including but not limited to reducing or ceasing our operations.
On July 19,Our principal sources of liquidity since our inception have been revenues, proceeds from sales of equity securities, borrowings from banks, our shareholders and government, cash from the exercise of options and warrants and proceeds from the divestiture of part of our businesses. As of September 30, 2021, we had cash, cash equivalents and short-term investments representing bank deposits of $1.3 million. Based on the projected cash flows and our cash balances as of September 30, 2021, our Compensation Committeemanagement is of the Boardopinion that without further fund raising or other increase in our cash, we will not have sufficient resources to enable us to continue our operations for a period of Directors, orat least the Board, approved,next 12 months. As a result, there is substantial doubt about our ability to continue as a going concern. We are attempting to raise additional funds and recommendedto increase our cash and in connection therewith are negotiating with our controlling shareholder, Mr. Jerry Ivy, the Boardterms of a loan agreement that would address our cash needs. While we believe in our ability to approve,raise additional funds and increase our new 2021 equity incentive plan, or the Plan. On July 22, 2021, the Board approved the Plan. Following approval of the Plan we ceased issuing securities under our 2001 Stock Option Plan.cash, there can be no assurances to that effect.
The Plan provides us withIf additional financing is not available when required or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, which could have a general guidance asmaterial adverse effect on our revenue, results of operations and financial condition. To preserve our cash resources, we may be required to the grants of equityreorganize our operations. If we are unable to employeesfund our operations without additional external financing and service providers (such as the types of equitytherefore cannot sustain future operations, we may be required to be granted, vesting schedules, determination of exercise prices, exercise of options, etc.) as well as containing provisions needed for the compliance with the requirements of the Israeli Tax Authority. The below summary is subject to the full terms of the Plan that is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2.
The purpose of the Plan is to increase shareholder value and to advance the interests of the Company by furnishing economic incentives.
Administration of the Plan
The Plan is administered by the Board cease our operations and/or by a committee comprised of some of its members, which shall have the power and authority detailed in the Plan. References to the Board include also such committee. All decisions, determinations and interpretations of the Board shall be final and binding on all grantees. No member of the Board shall be liable towards any grantee for any action taken or determination made in good faith with respect to the Plan or any securities issued thereunder.seek bankruptcy protection.
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Designation of Grantees
The persons eligible for participation in the Plan as grantees, or Grantees, are any employees and non-employees of the Company and/or of any of the Company’s affiliates and any other person which the Board determines to be eligible for the issuance of awards. Securities under Section 102, or Section 102, of the Israeli Income Tax Ordinance, or ITO, shall be issued only to employees of the Company and/or an affiliate thereof.
Shares Subject to the Plan
The aggregate number of shares reserved for the purposes of the Plan shall be fixed from time to time by the Board. Currently there are 3.9 million shares reserved for issuance under the Plan. Any shares which at the time of termination of the Plan remain unissued and do not underlie any outstanding options, shall cease to be reserved for the purpose of the Plan. Should any option, or any portion thereof, for any reason expire or be cancelled prior to its exercise, the shares subject to such option shall become available for issuance or sale under the Plan. Shares may be made available from the authorized but unissued shares of the Company or from shares held in the Company’s treasury.
With respect to the Restricted Shares (as defined below), the Grantee shall also have, subject to the full vesting of Restricted Shares and the provisions of the Articles of Association of the Company, the right to sell such shares.
Issuance of Restricted Shares
The Board may issue Shares which shall be subject to certain restrictions, or Restricted Shares, and condition their grant or vesting upon the attainment of specified performance targets or such other factors as the Board may determine.
Upon delivery of a notice to the Grantee of non-achievement of the vesting milestones, setting forth the number of Shares to be repurchased or forfeited by the Company, or the Repurchased Shares, the Company shall become the legal and beneficial owner of the Repurchased Shares and all rights and interests therein or thereto without the necessity for any action on the part of the Company or Grantee.
Term of Option
Each unexercised option granted pursuant to the Plan shall expire upon the tenth anniversary of the date of grant thereof or earlier, in the event of termination of Grantee’s employment or service with the Company or any of its subsidiaries, unless the Board established a shorter or longer term for an option or there are circumstances under which such option shall be cancelled or expire.
Exercise Price and Consideration
The exercise price shall be determined by the Board in its sole discretion. The proceeds received by the Company from the issuance of Shares and/or Shares subject to options will be added to the general funds of the Company and used at the Company’s discretion.
Vesting of the Options
Generally, options shall vest and become exercisable according to the following three year vesting schedule, such that one third (1/3) of the options granted shall become vested upon lapse of each year as of the date of grant, or any other date determined by the Board, provided that on and before the respective preceding vesting dates the option holder, or the Optionee, shall be and shall have been continuously employed by the Company or provided services to the Company. The vesting provisions of individual options or Restricted Shares may vary, as the Board may determine.
Exercise of Options
The exercise of options shall be effective upon receipt of Optionee’s written notice by the Company together with full payment of the exercise price and the execution and delivery of any other required document. The notice of exercise is irrevocable and may not be rescinded or revised once it has been delivered to the Company.
Each vested option granted under the Plan shall be exercisable. However, no option shall be exercisable after the expiration date set forth in the grant agreement.
The exercise of options may be made through a net exercise mechanism as set forth in the Plan.
The options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the options become vested and exercisable, prior to the expiration date, and provided that the Optionee is employed by or providing services to the Company or any of its affiliates, at all times during the period beginning with the date of grant and ending upon the date of exercise.
Right as a Shareholder
Shares and options issued pursuant to the Plan shall be issued in the name of the Grantee or to a trustee, or the Trustee, in the name of the Grantee, as applicable. With respect to options, prior to exercise and until the registration of the Optionee as a holder of Shares in the Company’s register of shareholders, an Optionee, as such, shall have no right to vote or receive dividends or any other rights of or as a shareholder
An Optionee shall not have any of the rights or privileges of a shareholder in the Company in respect of any Shares purchasable upon the exercise of any options, until the Optionee shall have exercised the option, paid the exercise price and applicable tax thereof and have been registered as a holder of such Shares in the Company’s register of shareholders upon exercise of the options in accordance with the provisions of the Plan.
Termination of Employment
In the event of termination other than for cause, as such term is defined in the Plan, all options issued to that Optionee, which are vested and exercisable at the time of such termination, may be exercised within the period specified in the Plan and then will expire. Any Shares covered by the unvested portion of the option shall revert back to the Plan. In the event of termination for cause, all outstanding options granted to such Optionee (whether vested or not) shall, to the extent not theretofore exercised, immediately expire and shall be of no further force and effect as of the date of such termination and shall revert to the Plan.
With respect to an unapproved 102 Option, which are options that do not qualify for favorable tax treatment under the ITO, the Optionee shall extend to the Company and/or its affiliate security or guarantee for the payment of tax due at the time of sale of Shares, all in accordance with the provisions of Section 102.
Adjustments
A Grantee’s rights to purchase or receive Shares under the Plan shall be adjusted in the event of changes in capitalization, such as share split and reverse share split, dissolution or liquidation. In addition, special arrangements will take place in the case of certain transactions, or a Transaction, which is defined as (i) a merger, consolidation, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity (or if in the context of a reverse triangular merger, the Company is the surviving entity), (ii) an acquisition of all or over 50% of the shares of the Company in a transaction or series of related transactions. For the avoidance of doubt, any merger or reverse triangular merger with a publicly traded entity in which the shareholders of the Company prior to such transaction hold more than 50% of the shares of the combined entity, shall not be considered a Transaction; (iii) a sale and/or transfer (including by way an exclusive license) of all or substantially all of the assets or shares of the Company to a third party(ies); or (iv) such other transaction with a similar effect, as shall be determined by the Board in each case, other than a transaction or series of a related transaction for the sole purpose of effecting a change in domicile of the Company.
In the event of a Transaction, all unvested options and Restricted Shares of employees who worked at least one year with the Company shall fully vest immediately prior to the consummation of a Transaction and each outstanding unexercised option and Restricted Share may be assumed by the successor company or an affiliate thereof, or may be replaced by a share option, or a share, as applicable, in, or right against, the successor company or an affiliate thereof, and appropriate adjustments shall be made in the number of shares (and respectively, in the case of options, the exercise price per share) in order to reflect such an assumption or replacement. If the options and/or the Restricted Share are not assumed or substituted, the Board may decide that the vesting periods set forth in the grant agreements shall be fully or partially accelerated.
In connection with a Transaction, the Board may also determine that all options and Restricted Shares which are “in the money” with respect to the Transaction, shall be replaced with the right of the Optionee to receive the difference between the per-share consideration being paid in the Transaction for each Share, and the exercise price, minus the amount of any applicable withholding taxes, and all options and/or Restricted Shares which are not “in the money” may, at the full discretion of the Board, be cancelled or assumed as aforesaid. In addition, the Board may decide that the Optionees shall be subject to all or some of the same terms and conditions, and risks, as the risks being taken by the Company’s shareholders in the Transaction, pro rata and mutatis mutandis.
Designation of Shares and/or Options Pursuant to Section 102
The Board may designate Shares and/or options to qualify under Section 102 under the capital gains route or ordinary income route.. Such election shall be filed with the Israeli Tax Authority, and shall obligate the Company to issue only one type of approved 102 Shares, or Approved 102 Shares, and/or approved 102 Options, or Approved 102 Options, it has elected.
Trustee
Any Approved 102 Shares and/or Approved 102 Options shall be issued pursuant to the Plan to a Trustee who shall hold them in trust pursuant to the Company’s instructions from time to time.
Dividends
With respect to all Shares issued, the Grantee (or the Trustee of his behalf, in the case of 102 Shares or Shares issued upon the exercise of 102 Options) shall be entitled to receive dividends in accordance with the quantity of such Shares, subject to the provisions of the Company’s Articles of Association and subject to any applicable taxation on distribution of dividends, and, when applicable, subject to the provisions of Section 102.
Amendment and Termination of the Plan
The Board may terminate, alter, adjust, suspend or amend the Plan, or any part thereof, in any respect, except that if at any time the approval of the shareholders of the Company is required pursuant to the Israeli Companies Law, 1999 or the regulations promulgated thereunder, the Board may not effect such modification or amendment without such approval.
Governing Law
The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Israel, notwithstanding the conflicts of laws principles of any jurisdiction. The competent courts in Tel Aviv shall have sole and exclusive jurisdiction over any dispute with regard to any controversy or claim arising under, out of, or in connection with this Plan, its validity, its interpretation, its execution or any breach or claimed breach thereof.
Item 6. Exhibits.
| 3.1 | |
| 3.2 | |
| Rule 13a-14(a) Certification of Chief Executive Officer. |
| 31.2* | Rule 13a-14(a) Certification of Chief Financial Officer. |
| 32.1** | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
| 32.2** | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
| The following materials from our Quarterly Report on Form 10-Q for the quarter ended | |
| 104* | Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ON TRACK INNOVATIONS LTD.
| By: | /s/ | |
| (Principal Executive Officer) | ||
| Dated: | ||
| By: | /s/ Assaf Cohen | |
| Assaf Cohen, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| Dated: | ||
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