UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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) | (I.R.S. Employer Identification No.) |
Hatnufa 5, Yokneam Industrial Zone Box 372, Yokneam, Israel | 2069200 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: + 972-4-6868000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
None |
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares, par value NIS 0.10 per share |
(Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | Smaller reporting company ☒ | |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $11,596,882. The number of shares of the registrant’s Ordinary Shares outstanding on April 4, 2022, was 75,775,393.
EXPLANATORY NOTE
On April 13, 2022, On Track Innovations Ltd. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Original Form 10-K”). This Amendment No. 1 (the “Amendment”) amends the Original Form 10-K solely to correct typographical errors in the previously-issued audit opinion under Item 8 – Financial Statements and Supplementary Data.
This Amendment speaks as of the original filing date and does not reflect events occurring after the filing of the Original Form 10-K. Other than correcting the audit opinion as described above and filing the related consent of the auditor as Exhibit 23.1 to this Amendment, no revisions are being made to the Company’s financial statements or any other disclosure contained in the Original Form 10-K.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), new certifications by the Company’s principal executive officer and principal financial officer are filed herewith as exhibits to this Amendment pursuant to Rule 13a-14(a) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
This Amendment does not otherwise update any exhibits as originally filed or previously amended.
PART II
Item 8. Financial Statements and Supplementary Data.
Our financial statements are stated in thousands of United States dollars and are prepared in accordance with U.S. GAAP.
The following audited consolidated financial statements are filed as part of this Amendment:
1
PART IV
Item 15. Exhibits and Financial Statement Schedules.
2
* | Filed with the Original Form 10-K. |
** | Furnished herewith. | |
*** | Filed herewith. |
+ | Management contract or compensation plan. |
3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
Dated: April 15, 2022 | By: | /s/ Amir Eilam |
Amir Eilam | ||
Chief Executive Officer |
4
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Financial Statements
as of December 31, 2021
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Financial Statements as of December 31, 2021
Contents
F-1
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of
On Track Innovations Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of On Track Innovations Ltd. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss, changes in equity and cash flows for each of the years then ended, including the related notes (collectively referred to as the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(A) to the consolidated financial statements, the Company has incurred recurring losses from operations, cash outflows from operating activities and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2(A). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) related to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. We determined there are no critical audit matters.
/s/ Kesselman & Kesselman | |
Certified Public Accountants (Isr.) | |
A member firm of PricewaterhouseCoopers International Limited | |
Haifa, Israel | |
April 13, 2022 |
We have served as the Company’s auditor since 2019.
F-2
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Balance Sheets
US dollars in thousands
December 31 | ||||||||
2021 | 2020 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 815 | $ | 1,377 | ||||
Short-term investments | - | 105 | ||||||
Trade receivables (net of allowance for doubtful accounts of $614 and $620 as of December 31, 2021 and December 31, 2020, respectively) | 3,274 | 1,148 | ||||||
Other receivables and prepaid expenses | 1,159 | 695 | ||||||
Inventories | 3,200 | 2,479 | ||||||
Assets from discontinued operations - held for sale | - | 6,358 | ||||||
Total current assets | 8,448 | 12,162 | ||||||
Non-current assets | ||||||||
Restricted bank deposit | 105 | - | ||||||
Long term restricted deposit for employee benefits | 529 | 511 | ||||||
Severance pay deposits | 485 | 411 | ||||||
Property, plant and equipment, net | 673 | 752 | ||||||
Intangible assets, net | 162 | 247 | ||||||
Right-of-use assets due to operating leases | 2,134 | 2,903 | ||||||
Total non-current assets | 4,088 | 4,824 | ||||||
Total Assets | $ | 12,536 | $ | 16,986 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Balance Sheets
US dollars in thousands except share data
December 31 | ||||||||
2021 | 2020 | |||||||
Liabilities and Equity | ||||||||
Current Liabilities | ||||||||
Short-term bank credit and current maturities of long-term bank loans | $ | 2,095 | $ | 542 | ||||
Convertible short-term loan from shareholders, including a controlling shareholder | 1,745 | 625 | ||||||
Trade payables | 4,657 | 1,667 | ||||||
Other current liabilities | 2,832 | 2,283 | ||||||
Liabilities from discontinued operations - held for sale | - | 5,829 | ||||||
Total current liabilities | 11,329 | 10,946 | ||||||
Long-Term Liabilities | ||||||||
Long-term loans, net of current maturities | 21 | 14 | ||||||
Long-term liabilities due to operating leases, net of current maturities | 1,650 | 2,343 | ||||||
Accrued severance pay | 1,038 | 977 | ||||||
Total long-term liabilities | 2,709 | 3,334 | ||||||
Total Liabilities | 14,038 | 14,280 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Equity | ||||||||
Shareholders’ (Deficit) Equity | ||||||||
Ordinary shares of NIS 0.1 par value: Authorized – 120,000,000 and 100,000,000 shares as of December 31, 2021 and 2020, respectively; issued: 76,954,092 and 55,003,076 shares as of December 31, 2021 and 2020, respectively; outstanding: 72,789,893 and 53,824,377 shares as of December 31, 2021 and 2020, respectively | 2,008 | 1,423 | ||||||
Additional paid-in capital | 233,462 | 227,209 | ||||||
Treasury shares at cost - 1,178,699 shares as of December 31, 2021 and 2020 | (2,000 | ) | (2,000 | ) | ||||
Accumulated other comprehensive loss | (348 | ) | (961 | ) | ||||
Accumulated deficit | (234,624 | ) | (222,965 | ) | ||||
Total Shareholders’ (Deficit) Equity | (1,502 | ) | 2,706 | |||||
Total Liabilities and Equity | $ | 12,536 | $ | 16,986 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Operations
US dollars in thousands except share and per share data
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Revenues | ||||||||
Sales | $ | 13,278 | $ | 11,392 | ||||
Software as a Service (“SaaS”) | 1,597 | 1,350 | ||||||
Total revenues | 14,875 | 12,742 | ||||||
Cost of revenues | ||||||||
Cost of sales | 10,848 | 7,641 | ||||||
Total cost of revenues | 10,848 | 7,641 | ||||||
Gross profit | 4,027 | 5,101 | ||||||
Operating expenses | ||||||||
Research and development | 3,718 | 3,531 | ||||||
Selling and marketing | 2,893 | 3,233 | ||||||
General and administrative | 3,383 | 3,017 | ||||||
Total operating expenses | 9,994 | 9,781 | ||||||
Operating loss from continuing operations | (5,967 | ) | (4,680 | ) | ||||
Financial expenses derived from convertible short-term loan from shareholders, including a controlling shareholder | (3,748 | ) | (90 | ) | ||||
Other financial expenses, net | (387 | ) | (280 | ) | ||||
Financial expenses, net | (4,135 | ) | (370 | ) | ||||
Loss from continuing operations before taxes on income | (10,102 | ) | (5,050 | ) | ||||
Income tax benefit, net | 13 | 10 | ||||||
Net loss from continuing operations | (10,089 | ) | (5,040 | ) | ||||
Net loss from discontinued operations | (1,570 | ) | (1,093 | ) | ||||
Net loss | $ | (11,659 | ) | $ | (6,133 | ) | ||
Basic and diluted net loss attributable to shareholders per ordinary share | ||||||||
From continuing operations | $ | (0.15 | ) | $ | (0.09 | ) | ||
From discontinued operations | $ | (0.03 | ) | $ | (0.02 | ) | ||
$ | (0.18 | ) | $ | (0.11 | ) | |||
Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share | 65,567,409 | (*)55,665,816 |
(*) | 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 2N. |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Comprehensive Loss
US dollars in thousands
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Total comprehensive loss: | ||||||||
Net loss | $ | (11,659 | ) | $ | (6,133 | ) | ||
Exchange differences on translation released following sale of a subsidiary | 746 | - | ||||||
Exchange differences on translation of foreign continuing operations | (81 | ) | (1 | ) | ||||
Exchange differences on translation of foreign discontinued operations | (52 | ) | 14 | |||||
Total comprehensive loss | $ | (11,046 | ) | $ | (6,120 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Changes in Equity
US dollars in thousands, except share data
Accumulated | ||||||||||||||||||||||||||||
Number of | Additional | other | ||||||||||||||||||||||||||
Shares | Share | paid-in | Treasury | comprehensive | Accumulated | Total | ||||||||||||||||||||||
issued | capital | capital | Shares | loss | deficit | equity | ||||||||||||||||||||||
Balance as of January 1, 2020 | 47,963,076 | $ | 1,226 | $ | 225,970 | $ | (2,000 | ) | $ | (974 | ) | $ | (216,832 | ) | $ | 7,390 | ||||||||||||
Changes during the year ended | ||||||||||||||||||||||||||||
December 31, 2020: | ||||||||||||||||||||||||||||
Issuance of shares, net of issuance costs of $39 (*) | 7,040,000 | 197 | 1,172 | - | - | - | 1,369 | |||||||||||||||||||||
Stock-based compensation (*) | - | - | 67 | - | - | - | 67 | |||||||||||||||||||||
Exchange differences on translation of foreign operations | - | - | - | - | 13 | - | 13 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (6,133 | ) | (6,133 | ) | |||||||||||||||||||
Balance as of December 31, 2020 | 55,003,076 | $ | 1,423 | $ | 227,209 | $ | (2,000 | ) | $ | (961 | ) | $ | (222,965 | ) | $ | 2,706 | ||||||||||||
Changes during the year ended | ||||||||||||||||||||||||||||
December 31, 2021: | ||||||||||||||||||||||||||||
Issuance of shares, net of issuance costs of $128 (*) | 18,965,516 | 585 | 2,587 | - | - | - | 3,172 | |||||||||||||||||||||
Stock-based compensation (*) | 2,985,500 | - | 100 | - | - | - | 100 | |||||||||||||||||||||
Exchange differences on translation of foreign operations | - | - | - | - | (**)613 | - | 613 | |||||||||||||||||||||
Classification of embedded derivative from liability to equity (***) | - | - | 3,566 | - | - | - | 3,566 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (11,659 | ) | (11,659 | ) | |||||||||||||||||||
Balance as of December 31, 2021 | 76,954,092 | $ | 2,008 | $ | 233,462 | $ | (2,000 | ) | $ | (348 | ) | $ | (234,624 | ) | $ | (1,502 | ) |
(*) | See Note 12 regarding Restricted Shares Awards. |
(**) | Including exchange differences on translation released following sale of a subsidiary in amount of $746. |
(***) | See Note 9. |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Cash Flows
US dollars in thousands
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Cash flows from continuing operating activities | ||||||||
Net loss from continuing operations | $ | (10,089 | ) | $ | (5,040 | ) | ||
Adjustments required to reconcile net loss to net cash used in continuing operating activities: | ||||||||
Stock-based compensation related to options, restricted stock awards and | ||||||||
shares issued to employees and others | 100 | 67 | ||||||
Accrued interest, linkage differences, net | (61 | ) | 110 | |||||
Financial expenses derived from convertible short-term loan from shareholders, including a controlling shareholder | 3,748 | 90 | ||||||
Depreciation and amortization | 378 | 419 | ||||||
Deferred benefits, net | (13 | ) | (36 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Change in accrued severance pay, net | (13 | ) | 65 | |||||
(Increase) decrease in trade receivables, net | (2,290 | ) | 989 | |||||
(Increase) decrease in other receivables and prepaid expenses | (438 | ) | 115 | |||||
(Increase) decrease in inventories | (727 | ) | 541 | |||||
Increase in trade payables | 3,011 | 1,027 | ||||||
Increase (decrease) in other current liabilities | 766 | (212 | ) | |||||
Net cash used in continuing operating activities | (5,628 | ) | (1,865 | ) | ||||
Cash flows from continuing investing activities | ||||||||
Purchase of property and equipment and intangible assets | (247 | ) | (407 | ) | ||||
Change in short-term investments, net | - | 2,216 | ||||||
Net cash (used in) provided by continuing investing activities | (247 | ) | 1,809 | |||||
Cash flows from continuing financing activities | ||||||||
(Decrease) Increase in short-term bank credit, net | (174 | ) | (215 | ) | ||||
Convertible short-term loan received from shareholders, including a controlling shareholder, net of transaction expenses | 923 | 578 | ||||||
Long-term loan received | 18 | - | ||||||
Repayment of long-term bank loans | (7 | ) | (7 | ) | ||||
Proceeds from issuance of shares, net of issuance costs | 3,187 | 1,369 | ||||||
Net cash provided by continuing financing activities | 3,947 | 1,725 | ||||||
Cash flows from discontinued operations | ||||||||
Net cash used in discontinued operating activities | (2,096 | ) | (2,065 | ) | ||||
Net cash provided by (used in) discontinued investing activities | 2,926 | (948 | ) | |||||
Net cash (used in) provided by discontinued financing activities | (380 | ) | 1,204 | |||||
Total net cash provided by (used in) discontinued operations | 450 | (1,809 | ) | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (101 | ) | (9 | ) | ||||
Decrease in cash, cash equivalents and restricted cash | (1,579 | ) | (149 | ) | ||||
Cash, cash equivalents and restricted cash - beginning of the year (*) | 2,499 | 2,648 | ||||||
Cash, cash equivalents and restricted cash at the end of the year (*) | $ | 920 | $ | 2,499 |
(*) | Including cash and cash equivalents from discontinued operations held for sale. See also Note 14. |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Cash Flows (cont’d)
US dollars in thousands
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Supplementary cash flows information: | ||||||||
Cash paid during the period for: | ||||||||
Interest paid (*) | $ | 101 | $ | 83 | ||||
Income taxes paid | $ | - | $ | (**)41 | ||||
Income taxes refund received | $ | 6 | $ | 83 |
(*) | Including interest paid as used in discontinued operations in amount of $7 and $10 for the years ended December 31, 2021 and 2020, respectively |
(**) | Derives from discontinued operations |
Supplemental disclosures of non-cash flow information | ||||||||
Payables due to issuance costs | $ | 15 | $ | - | ||||
Payables due to transaction expenses related to convertible short-term loan received from shareholders, including a controlling shareholder | $ | - | $ | 43 | ||||
Payables due to purchase of property and equipment and intangible assets | $ | 9 | $ | 14 | ||||
Classification of embedded derivative from liability to equity | $ | 3,566 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - General
A. | Introduction |
On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together, the “Group”) are principally engaged in the field of design and development of cashless payment solutions.
The Company’s ordinary shares are listed for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 31, 2019).
On January 10, 2022, the Company filed a petition (the “Petition”) with the Israeli county court of Nazareth, seeking protections from its creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after the Company’s Board of Directors determined that the Company is insolvent from a cash flow perspective.
On January 19, 2022, the Company entered into a binding term sheet (the “Term Sheet”), with Nayax Ltd. (“Nayax”). The Term Sheet provides that the Company and Nayax will enter into a two-step transaction relating to (i) Nayax extending to the Company a senior secured convertible loan in amount of $5,500 (the “Nayax Loan”), and (ii) the purchase by Nayax of 100% of the Company’s share capital in consideration for $4,500. Consequently, to the entry into the Term Sheet, and at the Company’s request, the Israeli county court of Nazareth dismissed the Petition.
On January 27, 2022 (the “Effective Date”), the Company entered into a definitive agreement and debenture relating to the Nayax Loan (the “Nayax Loan Agreement”). On March 17, 2022, the Company entered into an Agreement and Plan of Merger, with Nayax and OTI Merger Sub Ltd., an |Israeli company, wholly owned by Nayax, (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving as a direct wholly-owned subsidiary of Nayax, in exchange for $4,500 in cash (the “Merger”).
As of December 31, 2021, the Company operates in two operating segments: (a) Retail, and (b) Petroleum (see Note 15).
Certain definitions
$ - United States Dollars
NIS - New Israeli Shekel
B. | Divestiture of operations |
1. | In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property (“IP”) relating to its Smart ID division, for a total 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 claimed that additional earn-out payments were not 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.
F-10
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 – General (cont’d)
B. | Divestiture of operations (cont’d) |
1. | Cont’d |
The arbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that the Company was 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 was not 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 was 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 Note 10D.
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 had been conducting the Company’s Mass Transit Ticketing business in Europe. |
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.
F-11
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 – Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The significant accounting policies followed in the preparation of the financial statements, applied on a consistent basis, are as follows:
A. | Liquidity and Capital Resources |
The Company has had recurring losses and cash outflows from operating activities. It has an accumulated deficit as of December 31, 2021 of $234,624 and a shareholder’s equity deficit of $1,502. As of December 31, 2021 the Company also has a payable balance on its short-term bank loan, that is due within the next 12 months of $2,095 and a convertible short-term loan from shareholders (including a controlling shareholder) including accrued interest, of $1,745. On January 10, 2022, the Company filed the petition with the Court, seeking protections from its creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after the Company’s Board of Directors determined that the Company is insolvent from a cash flow perspective. However, following the signing of the Term Sheet with Nayax, as mentioned in Note 1A, such Petition was dismissed. At the end of January 2022, the Company signed the agreement relating to the Nayax Loan in amount of $5,500, as mentioned in Note 1A, and received the proceeds from this Nayax Loan. Consequently, all amounts due under the convertible loan from shareholders (including the Company’s controlling shareholder) and the bank loan, were paid in full. In addition, Nayax has provided the Company with a full guarantee for a $2,000 short-term loan provided to the Company by a bank at the end of February 2022, and additional guarantees to the Company’s suppliers and subcontractors to allow it to maintain its ongoing production and sale of its products.
Since inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities (regarding to the issuance of shares during the reporting period, see Note 12), 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 and cash equivalents of $815 as of December 31, 2021.
The ongoing 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. On April 21, 2021, the Company completed the sale of ASEC, including its Mass Transit Ticketing activity, as disclosed in Note 1B(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.
F-12
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 – Significant Accounting Policies (cont’d)
A. | Liquidity and Capital Resources (cont’d) |
In the event where the Merger, as mentioned in Note 1A, is not completed, under certain circumstances, the Company will be required to pay Nayax a termination fee of $1,500. Furthermore, non-completion of the merger would be considered an “event of default” under the Nayax Loan Agreement, which can result in Nayax’s requirement for an immediate repayment of the Nayax Loan, or an increase of the annual interest on the Nayax Loan from 10% to 16% interest, at Nayax’s sole discretion. At any time after the earlier of (i) an event of default, as contemplated in the Nayax Loan Agreement, or (ii) the completion of the Merger Agreement, and prior to the repayment of the Nayax Loan which shall be due and payable in full by the Company on the second anniversary of the Effective Date, Nayax is entitled, at its sole discretion, to convert the Nayax Loan into ordinary shares of the Company at a price per share equal to $0.043. The Company will also be required to repay the bank loan provided with Nayax’s guarantee and would be exposed to a risk of not being able to conduct the Company’s business due to the loss of the guarantees provided by Nayax to the Company’s suppliers and subcontractors. Based on the projected cash flows and the Company’s cash balances as of December 31, 2021, the Company believes that without: (1) the completion of the Merger and increase of the Company’s cash by receiving additional loans from Nayax (at Nayax’s sole discretion) under the terms set under the Nayax Loan Agreement; or (2) other increase in the Company’s cash, the Company will not have sufficient resources to enable it to continue its operations for a period of at least the next 12 months, and may need to commence insolvency proceedings. As a result, there is a substantial doubt regarding the Company’s ability to continue as a going concern. 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, South Africa, the United States, Poland, and elsewhere. Such steps include working from home where possible, minimizing face-to-face meetings, utilizing video conferencing 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 global shortage in components, which caused an increase in components prices, freight cost and longer lead-time, created a delay in fulfilling customers’ orders which adversely impacted the Company’s revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, the Company encouraged its customers to provide a forecast for their demand. The Company continues to maintain a comprehensive network of world-wide suppliers in order to optimize its access to critical components. As long as the COVID-19 pandemic continues, and possibly also thereafter, the components’ lead-time may be longer than normal, and the shortage in components may continue or get worse.
It is difficult to predict with certainty what other impacts the COVID-19 pandemic may have on the Company.
F-13
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
B. | Financial statements in U.S. dollars |
Substantially all of the Company’s and certain of its subsidiaries’ revenues are in U.S. dollars. A significant portion of purchases of materials, components and marketing costs are denominated in U.S. dollars. Therefore, both the functional and reporting currencies of the Company and certain of its subsidiaries are the U.S. dollar.
Transactions and balances denominated in U.S. dollars are presented at their original amounts.
For entities with a U.S. dollar functional currency, transactions and balances in other currencies are remeasured into U.S. dollars in accordance with the principles set forth in Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters, i.e. at the date the transaction is recognized, each asset, liability, or instance of revenue, expense, gain, or loss arising from the transaction is measured and recorded in the functional currency by use of the exchange rate in effect at that date. When translation using the exchange rates at the dates that the numerous revenues, expenses, gains and losses are recognized is impractical, an appropriately weighted average exchange rate for the period is used to translate those elements.
At each balance sheet date, recorded balances of monetary assets and liabilities that are denominated in a currency other than the functional currency are adjusted to reflect the current exchange rate. Exchange gains and losses from the remeasurement of such items denominated in non U.S. dollar currencies are reflected in the consolidated statements of operations, among ‘financial expenses, net’, as appropriate.
The functional currency of the Company’s subsidiary in South Africa is the U.S. dollar. The functional currency of the Polish subsidiary is its local currency. The financial statements of companies with a functional currency that is not the U.S. dollar are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities, and weighted average exchange rates for revenues and expenses (which approximates the translation of each transaction). Translation adjustments resulting from the process of the aforesaid translation are included as a separate component of equity (accumulated other comprehensive gain or loss).
C. | Principles of consolidation |
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
D. | Estimates and assumptions |
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Such estimates include the valuation of useful lives of long-lived assets, revenue recognition, discontinued operations, valuation of accounts receivable and allowance for doubtful accounts, valuation of inventories, legal contingencies, the assumptions whether renewal options of lease period of buildings will be exercised in the future, the assumptions used in the calculation of stock-based compensation, income taxes and other contingencies. Estimates and assumptions are periodically reviewed by management and the effects of any material revisions are reflected in the period that they are determined to be necessary. Actual results, however, may vary from these estimates.
F-14
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
E. | Cash equivalents |
Cash equivalents are short-term highly liquid investments and debt instruments that are readily convertible to cash with original maturities of three months or less from the date of purchase. Bank deposits with original maturities of more than three months, or specific deposits that are intended to be held as bank deposits for more than three months, and which will mature within one year, are classified as short-term investments.
F. | Trade receivables |
Trade receivables are recorded at the invoiced amount and do not bear interest. Collections of trade receivables are included in net cash provided by operating activities in the consolidated statements of cash flows. The consolidated financial statements include an allowance for loss from receivables for which collection is in doubt. In determining the adequacy of the allowance consideration is given to each trade receivable historical experience, aging of the receivable, adjusted to take into account current market conditions and information available about specific debtors, including their financial condition, current payment patterns, the volume of their operations, and evaluation of the security received from them or their guarantors.
G. | Short-term investments |
Short-term investments consist of:
(1) | Bank deposits whose maturities are longer than three months from the date of purchase, but not longer than one year from the balance sheet date. |
(2) | Bank deposits whose maturities are less than three months from the date of purchase, but are intended to be held as bank deposits for more than three months. |
(3) | Restricted bank deposits whose maturities are not longer than one year from the balance sheet date (for further details, see Note 10B). |
H. | Inventories |
Inventories are stated at the lower of cost or net realizable value. Cost is determined by calculating raw materials, work in process and finished products on a “moving average” basis. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” Inventory write-offs are provided to cover risks arising from slow moving items or technological obsolescence. Such write-offs have been included in cost of revenues.
I. | Property, plant and equipment, net |
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Years | ||
Computers, software and manufacturing equipment | 3-5 | |
Office furniture and equipment | 5-16 | |
(mainly - 10) |
Leasehold improvements are amortized by the straight-line method over the shorter of the lease term or the estimated useful economic life of such improvements.
F-15
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
J. | Impairment of long-lived assets |
Long-lived assets, such as right-of-use assets due to operating leases, property, plant, and equipment, and intangible assets subject to amortization, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
K. | Revenue recognition |
The Group generates revenues from product sales manufactured based on the Company’s technology. In addition, the Company generates revenues from the technology it developed through SaaS arrangements, transaction fee arrangements and licensing agreements. Revenues are also generated from non-recurring engineering, customer services and technical support.
Topic 606 requires entities to follow a five-step process:
(1) Identify the contract(s) with a customer,
(2) Identify the performance obligations in the contract,
(3) Determine the transaction price,
(4) Allocate the transaction price to the performance obligations in the contract, and
(5) Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
For each contract, the Company exercises judgement to identify separate performance obligations and to evaluate, at the inception of the contract, if each distinct performance obligation within the contract is satisfied at a point in time or over time.
Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties.
In certain arrangements with variable consideration, the Company exercises judgement in order to estimate the amount of variable consideration to be included in the transaction price. In these arrangements, revenue is recognized over time as it is mainly attributed to ongoing services provided.
Revenue is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled for the promised goods or services based on standalone selling prices “SSP”. SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of a product or service when the Company sells the goods separately in similar circumstances and to similar customers.
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. For an analysis of the performance obligations and the timing of revenue recognition, for each type of the contract, see also Note 11.
In addition, when the Company has an unconditional right to receive proceeds before the performance obligation was fulfilled, it is required to record receivables against contract liabilities.
F-16
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
L. | Research, development costs and intangible assets |
Research and development costs, which consist mainly of labor costs, materials and subcontractors, are charged to operations as incurred.
In accordance with ASC Topic 350-40, “Internal Use Software”, the former subsidiary in Poland, ASEC, capitalized certain internal use software development costs associated with creating and enhancing internally developed software related to its operations. Software development activities generally consisted of three stages (i) the research and planning stage, (ii) the application and development stage, and (iii) the post-implementation stage. Costs incurred in the research and planning stage and in the post-implementation stage were expensed as incurred. Costs incurred in the application and infrastructure development stage were capitalized. These costs included personnel and related employee benefits expenses for employees who are directly associated with the software development. These capitalized costs were amortized on a straight-line basis over the estimated useful life of 5 years upon initial release of the software. The capitalized internal use software development costs, net of accumulated amortization, were $370 as of December 31, 2020, and presented as held for sale. Amortization expenses derive from the capitalized internal use software development costs were presented within discontinued operations in the consolidated statements of operations for all reporting periods in those financial statements.
According to ASC Topic 350, “Intangibles - Goodwill and Other,” software that is part of a product or process to be sold to a customer shall be accounted for under ASC Subtopic 985-20. The Company’s products contain embedded software which is an integral part of these products because it allows the various components of the products to communicate with each other and the products are clearly unable to function without this coding. The costs of product certification are capitalized once technological feasibility is determined. The Company determines that technological feasibility for its products is reached after all high-risk development issues have been resolved. Once the products are available for general release to the Company’s customers, the Company ceases capitalizing the product certification costs and all additional costs, if any, are expensed. The capitalized product certification costs are amortized on a product-by-product basis using straight-line amortization, over a period of 3 years. The amortization begins when the products are available for general release to the Company’s customers. As of December 31, 2021, the capitalized certification costs, net of accumulated amortization, are $162 (as of December 31, 2020 - $247).
Amortization expenses amounted to $157 and $180 for the years ended December 31, 2021 and 2020, respectively. The amortization is presented within research and development in the consolidated statements of operations.
F-17
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
M. | Stock-based compensation |
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated grant date fair values. The estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period.
ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”), requires estimating the fair value of stock-based payments awards on the date of the grant using an option pricing model.
The Company estimates forfeitures based on historical experience.
The Company elected to recognize compensation cost for awards with only service conditions that have a graded vesting schedule using the straight-line method.
N. | Basic and diluted net loss per share |
Basic and diluted net loss per ordinary share is computed based on the weighted average number of ordinary shares outstanding during each year. Shares issuable for little or no cash consideration, are considered outstanding ordinary shares and included in the computation of basic net loss per ordinary share as of the date that all necessary conditions have been satisfied. In years that discontinued operations are presented, the Company uses income from continuing operations (attributable to the parent entity) as the benchmark to determine whether potential common shares are dilutive or antidilutive. Therefore, when the Company records a loss from continuing operations and the issuance of option shares would be anti-dilutive due to the loss, but the Company has net income from discontinued operations, potential shares are excluded from the diluted calculation even though the effect on net income from discontinued operations would be dilutive.
Stock options and restricted shares awards in the aggregate amount of 17,700,354 (out of which 14,065,854 that derived from the convertible loan from shareholders expired subsequent to the balance sheet date following its repayment) and 6,483,656 outstanding as of the years ended December 31, 2021 and 2020, respectively, have been excluded from the calculation of the diluted net loss per ordinary share because all such securities have an anti-dilutive effect for those periods presented.
At the beginning of the second quarter of 2021, the Company offered its shareholders rights 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 ordinary shares, as mentioned in Note 12. The Rights Offering included an offer to all existing shareholders of the Company rights to purchase additional ordinary shares in consideration for a lower exercise price than the quoted share price on the OTCQX, which reflects a bonus element that is similar to a stock dividend. Therefore, basic and diluted net losses attributable to shareholders per ordinary share (“EPS”) 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 approximately 1.07 for the year ended December 31, 2020.
F-18
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
O. | 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, convertible loan 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.
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 9. Transaction expenses related to the embedded derivatives are recognized as financial expenses at the date of the initial recognition.
F-19
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
P. | Income tax |
The Company accounts for taxes on income in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date. The Company provides a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized.
The Company accounts for interest and penalties as a component of income tax expense.
Q. | Severance pay |
The Company’s liability for severance pay for some of its Israeli employees is calculated pursuant to Israeli Severance Pay Law, 1963 (the “Israeli Severance Pay Law”) based on the most recent salary of the employee multiplied by the number of years of employment, as of the balance sheet date. Those employees are entitled to one month’s salary for each year of employment or a portion thereof. Certain senior executives were entitled to receive additional severance pay. The Company records the liability as if it were payable at each balance sheet date on an undiscounted basis. The liability is classified based on the expected date of settlement, and therefore is usually classified as a long-term liability, unless the cessation of the employees is expected during the upcoming year.
The Company’s liability for those Israeli employees is partially provided for by monthly deposits for insurance policies and the remainder by an accrual. The value of these policies is recorded as an asset in the Company’s balance sheet.
The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the Israeli Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash redemption value of these policies. In addition, the Company has deposited certain amounts with a trustee, to compensate for any severance pay liability that is not covered by other funds. These deposits are restricted and may be withdrawn only for payment of severance pay liabilities. The severance pay funds and the restricted deposits for employee benefits are classified based on the classification of the corresponding liability.
In respect of other Israeli employees, the Company acts pursuant to the general approval of the Israeli Ministry of Labor and Welfare, pursuant to the terms of Section 14 of the Israeli Severance Pay Law, according to which the current deposits with the pension fund and/or with the insurance company exempt the Company from any additional obligation to these employees for whom the said depository payments are made. These deposits are accounted as defined contribution payments.
Severance pay expenses for the years ended December 31, 2021 and 2020 amounted to $280 and $249, respectively. Defined contribution plan expenses were $235 and $224 in the years ended December 31, 2021 and 2020, respectively.
F-20
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
R. | Advertising expenses |
Advertising expenses are charged to the statements of operations as incurred. Advertising expenses as presented within the results of the continuing operations for the years ended December 31, 2021 and 2020 amounted to $120 and $250, respectively.
S. | Concentrations of credit or business risk |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, bank deposits and trade receivables.
Cash equivalents are invested mainly in U.S. dollars with major banks in Israel and Europe. Management believes that the financial institutions that hold the Group’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
Most of the Company’s trade receivables are derived from sales to large and financially secure organizations. In determining the adequacy of the allowance, management bases its opinion, inter alia, on the estimated risks, current market conditions and in reliance on available information with respect to the debtor’s financial position. As for major customers, see Note 16. The Company acquires certain components of its products from single source manufacturers.
The activity in the allowance for doubtful accounts for the years ended December 31, 2021 and 2020 is as follows:
2021 | 2020 | |||||||
Allowance for doubtful accounts at beginning of year | $ | 620 | $ | 570 | ||||
Additions charged to allowance for doubtful accounts | 3 | 109 | ||||||
Write-downs charged against the allowance | (14 | ) | (82 | ) | ||||
Other | 5 | 23 | ||||||
Allowance for doubtful accounts at end of year | $ | 614 | $ | 620 |
T. | Commitments and contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigations, fines and penalties and other sources are recognized when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Loss recovery related to recovery of a loss when the recovery is less than or equal to the amount of the loss recognized in the financial statements is recognized if collection is probable and estimable. Gain contingencies are recognized only when resolved.
F-21
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
U. | Business divestures |
As described in Note 1B, the Company has sold certain operations. Upon reaching a definitive agreement with an acquirer, the Company recognizes the consideration received from the divesture, less all assets and liabilities sold, as a gain or loss.
Discontinued operations
Upon divesture of a business, the Company classifies such business as a discontinued operation, if the divested business represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
For disposals other than by sale such as abandonment, the results of operations of a business would not be recorded as a discontinued operation until the period in which the business is actually abandoned.
The Mass Transit Ticketing divesture and the SmartID Division divesture qualify as discontinued operations and therefore have been presented as such.
Assets and liabilities of discontinued operations that have not yet been actually sold are presented on the balance sheet as of the end of each reporting year in one line.
The results of businesses that have qualified as discontinued operations have been presented as such for all reporting periods. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations.
Any loss or gain that arose from the divesture of a business that qualifies as discontinued operations has been included within the results of the discontinued operations.
The Company also presents cash flows from discontinued operations separately from cash flows of continuing operations.
Contingent consideration
The Company’s sale arrangements consist of contingent consideration based on the divested businesses’ future sales or profits. The Company records the contingent consideration portion of the arrangement when the consideration is determined to be realizable. As of December 31, 2021, there is no outstanding contingent consideration following a settlement agreement that concluded the legal proceedings with SuperCom, as disclosed in Note 10D.
F-22
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
V. | Restricted Cash and Cash Equivalents in Statement of Cash Flows |
The Company implements the Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows:
December 31 | ||||||||
2021 | 2020 | |||||||
Cash and cash equivalents (*) | $ | 815 | $ | 2,394 | ||||
Restricted cash, cash equivalents and bank deposit | 105 | 105 | ||||||
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows | $ | 920 | $ | 2,499 |
(*) | Including cash and cash equivalents held for sale. See Notes 1B(2) and 14. |
W. | Leases |
The Company recognizes lease expenses according to the lease standard ASC 842 Lease, and related amendments.
The Company determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASC 842-10-25-2. If any of these five criteria is met, The Company classifies the lease as a finance lease; otherwise, the Company classifies the lease as an operating lease. When determining lease classification, the Company’s approach in assessing two of the mentioned criteria is: (i) generally 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) generally 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset.
Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
The standard also provides practical expedients for an entity’s ongoing accounting.
The Company elected the practical expedient to not separate lease and non-lease components for all of the Company’s leases, other than leases of real estate. Additionally, following the adoption of ASU 2016-02 and in subsequent measurements, the Company applies the portfolio approach to account for the operating lease right-of-use assets and liabilities for certain leases and incremental borrowing rates.
F-23
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
X. | Recently Adopted Accounting Pronouncements |
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”): 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 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 the Company’s financial position, results of operations and cash flows.
Y. | Recent accounting pronouncements |
1. | In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investments 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 will 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 this guidance to determine the impact it may have on its consolidated financial statements. |
F-24
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies (cont’d)
Y. | Recent accounting pronouncements (cont’d) |
3. | In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements. |
Note 3 – Short-term and long-term deposits
Balances at December 31, 2021 and 2020 consist of bank deposits. The bank deposits bear weighted average annual interest of 0.55% as of December 31, 2021 (As of December 31, 2020 – 0.8%).
See Note 10B as to restrictions on certain deposits.
Note 4 - Other Receivables and Prepaid Expenses
December 31 | ||||||||
2021 | 2020 | |||||||
Government institutions | $ | 149 | $ | 104 | ||||
Prepaid expenses | 166 | 257 | ||||||
Suppliers advance | 791 | 227 | ||||||
Other receivables | 53 | 107 | ||||||
$ | 1,159 | $ | 695 |
Note 5 - Inventories
December 31 | ||||||||
2021 | 2020 | |||||||
Raw materials | $ | 1,617 | $ | 926 | ||||
Finished products | 1,583 | 1,553 | ||||||
$ | 3,200 | $ | 2,479 |
Note 6 - Property, Plant and Equipment, Net
A. | Consist of: |
December 31 | ||||||||
2021 | 2020 | |||||||
Cost | ||||||||
Leasehold improvements | $ | 238 | $ | 245 | ||||
Computers, software and manufacturing equipment | 7,694 | 7,591 | ||||||
Office furniture and equipment | 192 | 193 | ||||||
Motor vehicles | 177 | 146 | ||||||
Total cost | 8,301 | 8,175 | ||||||
Total accumulated depreciation | 7,628 | 7,423 | ||||||
$ | 673 | $ | 752 |
F-25
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 6 - Property, Plant and Equipment, Net (cont’d)
B. | As to liens - See Note 10B. |
C. | Depreciation expenses amounted to $221 and $239 for the years ended December 31, 2021 and 2020, respectively. |
Note 7 - Other Current Liabilities
December 31 | ||||||||
2021 | 2020 | |||||||
Employees and related expenses | $ | 977 | $ | 516 | ||||
Accrued expenses | 1,060 | 811 | ||||||
Customer advances | 64 | 142 | ||||||
Short-term liabilities due to operating leases and current maturities | 691 | 762 | ||||||
Other current liabilities | 40 | 52 | ||||||
$ | 2,832 | $ | 2,283 |
Note 8 - Bank Loans
A. | Composition of long-term loans: |
December 31 | ||||||||
2021 | 2020 | |||||||
Long-term loans (*) | $ | 26 | $ | 15 | ||||
Less - current maturities | 5 | 1 | ||||||
$ | 21 | $ | 14 |
(*) | As of December 31, 2021 and 2020, the bank loans are denominated in South African Rand. |
B. | Composition of short-term loans, bank credit and current maturities of long-term loans: |
December 31 | ||||||||||
Interest rate (*) | 2021 | 2020 | ||||||||
In NIS | 4. 9 | 2,090 | 541 | |||||||
2,090 | 541 | |||||||||
Current maturities of long-term loans | 5 | 1 | ||||||||
$ | 2,095 | $ | 542 |
(*) | Interest in arrears as of December 31, 2021 – 11.2%. The bank credit was repaid subsequent to the balance sheet date - See Note 19. |
C. | Liens for short-term and long-term loans - see Note 10B. |
D. | As of December 31, 2021, the Group has authorized unused credit lines of $63. |
F-26
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 9 - Convertible short-term loan from 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 was 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, unless extended in writing and in advance at the sole option of Ivy, for such time from the initial closing. The amount lent bore 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 would 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 had been outstanding would 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 could 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 would 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 would 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 would be deemed of no force or effect at any time prior to obtaining such Shareholders’ Approval, if at all. The Company obtained such shareholders’ approval on March 2, 2021.
The Loan Agreement included 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 occurred, the Secured Amount would immediately become due and payable, without the need for any notice by the Lender.
F-27
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 9 - Convertible short-term loan from 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 was $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”). On December 16, 2021, the Lender exercised its option to extend the maturity date for the second time, and the parties entered into a second notice of exercise of option and agreement (the “Second Extension Agreement”), according to which the maturity date was further extended until January 28, 2022 (the “Second Extended Maturity Date”, and the “Second Extended Maturity Period”, as applicable). The Loan Amount had been bearing interest on all outstanding principal at an interest rate of 8.0% per annum up until the Maturity Date. During the Extended Maturity Period, the loan has been accrued interest on all outstanding principal and unpaid interest at an interest rate of 10% per annum, and it was agreed that the interest rate during the Second Extended Maturity Period would continue to bear interest at a rate of 10% per annum. The amount of interest on the Loan Amount accrued through December 17, 2021 was $138 (the “Interest Debt”). Any payment of interest was subject to withholding of taxes at source and the interest rates mentioned above were net of such withholding. Under the Second Extension Agreement, it was agreed that the Interest Debt would be payable on the Second Extended Maturity Date, while until then it would be considered part of the Loan Amount and would bear the Extension Interest rate. In the event of a conversion of the Loan amount, the Loan Amount and Interest Debt (if not otherwise paid by the Company) was to convert into ordinary shares of the Company at the conversion price of $0.124, as originally contemplated under the Loan Agreement.
As of December 31, 2021, the Secured Amount was $1,745, out of which $145 was accrued interest. On January 28, 2022, subsequent to the balance sheet date, the Secured Amount of $1,758 (including accrued interest of $158) was repaid to the Lender and the Additional Lender - See Note 19.
In accordance with ASC 815-15-25, Derivatives and Hedging, the conversion feature (“the conversion component”) was considered an 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-28
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 9 - Convertible short-term loan from 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 year ended December 31, 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 | ||||
Balance as of March 2, 2021 | $ | 8 | ||
Interest and amortization of debt discount and expense | 1,737 | |||
Balance as of December 31, 2021 | $ | 1,745 |
F-29
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Commitments and Contingencies
A. | Royalties to the Israel Innovation Authority (the “IIA”) |
The Company has entered into several research and development agreements, pursuant to which the Company received grants from the IIA, and is therefore obligated to pay royalties to the IIA at a rate of 3%-3.5% of its sales up to the amounts granted (linked to the U.S. dollar with annual interest at LIBOR as of the date of approval, for programs approved from January 1, 1999 and thereafter). The total amount of grants received as of December 31, 2021, net of royalties paid, was approximately $3,400 (including accrued interest). No grants from the IIA were received during the two-year period ended December 31, 2021.
The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. In September 2021, the Bank of Israel, which determines annual interest rates, published a directive which stated that annual interest at a variable rate linked to the LIBOR rate for loans in U.S. dollars will be replaced by the Secured Overnight Financing Rate (“SOFR”) in June 2023. It is not clear yet whether the IIA will replace the LIBOR with SOFR and when. It is not currently possible to determine precisely whether, or to what extent, the replacement of LIBOR with SOFR would affect the Company.
There is a dispute between the Company and the IIA in the amount of approximately NIS 3,600 ($1,158) including accrued interest (while the current debt to the IIA as presented in the Company’s financial statements amounts to approximately $133) 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 years ended December 31, 2021 and 2020, there were no royalty expenses.
B. | Liens |
The Company and certain subsidiaries have recorded floating charges on all of its tangible assets in favor of banks and subsequent to the balance sheet date in favor of Nayax.
The Company’s short-term deposits in the amount of $105 have been pledged as security in respect of guarantees granted. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.
C. | Guarantees |
As of December 31, 2021, the Company granted a guarantee in amount of $113, with an expiration date in May 2024.
F-30
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Commitments and Contingencies (cont’d)
D. | Legal claims |
1. | In June 2013, prior to the Company’s divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liabilities the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions, plus expenses and legal fees, 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 is 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 10E(2) below.
2. | On June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration, with respect to the additional financial details that Merwell claims that the Company was ordered to provide according to the arbitration verdict from February 21, 2016, and additional payments that Merwell claims that the Company is obligated to pay Merwell. The said financial details refer to the quantity of smart driving licenses that Merwell claims were issued in the later period of a project in Tanzania in which Merwell claims to have provided services to the Company. Merwell claims that despite the Company’s failure to provide the details, Merwell obtained the details independently from other sources, and they indicate that the Company is obligated to pay Merwell an additional amount of approximately $1,618, and there might be additional amounts to be claimed in the future, as additional information might be found from time to time. On March 4, 2020, the Company submitted a response to this complementary claim, rejecting Merwell’s claims. 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 1B(1) and 10E(1) above), the Company received NIS 5,128 (approximately $1,589) on August 10, 2021. The loss of $177 that derives from those settlements is presented within ‘loss from discontinued operations’. |
F-31
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Commitments and Contingencies (cont’d)
D. | Legal claims (cont’d) |
3. | In October 2013, a financial claim was filed against the Company and its then French subsidiary, Parx France (in this paragraph, together, the “Defendants”), in the Commercial Court of Paris, France (in this paragraph, the “Court”). The sum of the claim was €1,500 (approximately $1,698) and was based on the allegation that the plaintiff sustained certain losses in connection with Defendants not granting the plaintiff exclusive marketing rights to distribute and operate the Defendants’ PIAF Parking System in Paris and the Ile of France. On October 25, 2017, the Court issued its ruling in this matter dismissing all claims against the Company but ordering Parx France to pay the plaintiff €50 ($57) plus interest in damages plus another approximately €5 ($6) in other fees and penalties. As, in accordance with the sale agreement signed between the Company and Parx France, the Company was liable and should indemnify Parx France for any amount ruled against it as part of that claim, the Company offered to pay the amounts mentioned above to the plaintiff in consideration for not filing future appeals. The Plaintiff rejected this offer and filed an appeal against Parx France and the Company claiming the sum of €503 ($569) plus interest and expenses. On November 7, 2019, the Company’s external legal counsel concluded that the appeal was inadmissible, and that it believed that the opposing claims would be dismissed. The case was pleaded before the Court and the Court has provided a judgement, dated July 8, 2021, declaring that the appeal against the Company is null and void, and annulled the €50 ($57) damages pronounced by the previous court. |
4. | In July 2019, the Company received a request (the “Request”), to allow a petitioner to submit a class action, which concerns the petitioner’s claims that, inter alia, through the EasyPark card, drivers are permitted to exceed the quota of permitted hours in accordance with the instructions of various local authorities in Israel. The Request was submitted against a company 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-32
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 11 – Revenues
Disaggregation of revenue
The following table disaggregates the Company’s revenues by major source based on categories that depict its nature and timing as reviewed by management for the years ended December 31, 2021 and 2020:
Year ended December 31 | ||||||||||||
2021 | ||||||||||||
Retail | Petroleum | Total | ||||||||||
Cashless payment products (A) | $ | 7,484 | $ | - | $ | 7,484 | ||||||
Complete cashless payment solutions (B): | ||||||||||||
Sales of products (B1) | 3,570 | 1,688 | 5,258 | |||||||||
SaaS and other services (B2) | 1,169 | 964 | 2,133 | |||||||||
4,739 | 2,652 | 7,391 | ||||||||||
Total revenues | $ | 12,223 | $ | 2,652 | $ | 14,875 |
Year ended December 31 | ||||||||||||
2020 | ||||||||||||
Retail | Petroleum | Total | ||||||||||
Cashless payment products (A) | $ | 6,958 | $ | - | $ | 6,958 | ||||||
Complete cashless payment solutions (B): | ||||||||||||
Sales of products (B1) | 2,179 | 1,682 | 3,861 | |||||||||
SaaS and other services (B2) | 1,037 | 886 | 1,923 | |||||||||
3,216 | 2,568 | 5,784 | ||||||||||
Total revenues | $ | 10,174 | $ | 2,568 | $ | 12,742 |
F-33
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 11 – Revenues (cont’d)
Performance obligations
Below is a listing of performance obligations for the Company’s main revenue streams:
A. | Cashless payment products – |
The performance obligation is the selling of contactless payment products. Most of those products are Near Field Communication (NFC) readers. For such sales the performance obligation, transfer of control and revenue recognition occur when the products are delivered.
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 Note 11A 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 (excluding assets held for sales)
December 31 | December 31 | |||||||
2021 | 2020 | |||||||
Trade receivables, net of allowance for doubtful accounts | $ | 3,274 | $ | 1,148 | ||||
Customer advances | $ | 64 | $ | 142 |
Trade receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
Transaction price and variable consideration
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration, revenue is recognized over time as it is mainly attributed to ongoing services provided.
F-34
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 12 – Equity
A. | Share capital |
1. | On December 23, 2019, the Company entered into a share purchase agreement (the “Agreement”) with Jerry L Ivy, Jr. Descendants Trust (“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.
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 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 December 31, 2021.
The issuance costs derived from the Rights Offering were approximately $128.
3. | On December 2, 2021, the Company’s shareholders approved an increase in the Company’s authorized share capital, by NIS 2,000,000, divided into 20,000,000 ordinary shares of NIS 0.1 par value per share, to NIS 12,000,000, divided into 120,000,000 ordinary shares of NIS 0.1 par value per share, and approved to amend the Company’s Articles of Association and Memorandum of Association accordingly. |
B. | Shares to non-employees |
There were no grants to non-employees during the years ended December 31, 2021 and 2020.
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 12 – Equity (cont’d)
C. | Stock option plans |
In February 2001, the Board approved an option plan, under which up to 75,000 share options are to be granted to the Company’s employees, directors and consultants and those of the Company’s subsidiaries and affiliates.
During the years 2002 to 2014, the Board approved an increase of 16,375,000 options to be reserved under the Company’s share option plan.
On November 21, 2017, following the approval of the compensation committee and the Board, the shareholders of the Company approved an amendment to the Company’s share option plan, so that securities may be issued under such plan from time to time until December 31, 2021.
The vesting period for the options ranges from immediate vesting to ratable vesting over a four- year period. The exercise price of options under the plan is at varying prices. Those options expire up to five years after the date of the grant. Any options which are forfeited or cancelled before expiration become available for future grants.
The fair value of each option granted to employees during 2021 and 2020 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 113%-130 | % | 97%-109 | % | ||||
Risk-free interest rate | 0.17%-0.30 | % | 0.22%-1.53 | % | ||||
Expected life - in years | 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 during 2021 (including options to non-employees) and information as to options outstanding and options exercisable as of December 31, 2021 and 2020 are summarized in the following table:
Weighted | ||||||||||||
average | ||||||||||||
Number of options outstanding | exercise price per share | Aggregate intrinsic value | ||||||||||
Outstanding – December 31, 2020 | 1,443,333 | $ | 0.54 | |||||||||
Options granted | 670,000 | 0.23 | ||||||||||
Options expired or forfeited | (1,464,333 | ) | 0.45 | |||||||||
Outstanding – December 31, 2021 | 649,000 | $ | 0.42 | $ | - | |||||||
Exercisable as of: | ||||||||||||
December 31, 2021 | 139,678 | $ | 0.85 | $ | - |
The weighted average grant date fair value of options granted is $0.14 and $0.12 per option during 2021 and 2020, respectively.
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 12 – Equity (cont’d)
C. | Stock option plans (cont’d) |
The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of December 31, 2021:
Options outstanding | Options Exercisable | |||||||||||||||||||||||
Number | Weighted | Number | Weighted | |||||||||||||||||||||
outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||
as of | remaining | Average | As of | remaining | Average | |||||||||||||||||||
December 31, | contractual | Exercise | December 31, | contractual | Exercise | |||||||||||||||||||
Range of exercise price | 2021 | life (years) | Price | 2021 | life (years) | Price | ||||||||||||||||||
$ 0.20-0.90 | 547,000 | 3.36 | $ | 0.40 | 72,678 | 2.35 | $ | 0.54 | ||||||||||||||||
$ 1.07-1.22 | 102,000 | 0.91 | $ | 1.21 | 67,000 | 0.91 | $ | 1.21 | ||||||||||||||||
649,000 | 2.98 | 139,678 | 1.66 |
No options were exercised during the years ended December 31, 2021 and 2020.
As of December 31, 2021, there was $74 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 1.27 years. The total fair value of shares vested during the year ended December 31, 2021 was $45.
D. | Equity Incentive Plan |
On July 19, 2021, and September 22, 2021, each of the compensation committee of the Board (the “Committee”) and the Board approved a new incentive plan (the “Equity Incentive Plan”). In the fourth quarter of 2021, following the filing of the Equity Incentive Plan with the Israeli Tax Authorities, the waiver of certain options and signing of appropriate grant documents by the grantees, the Company granted 2,985,500 restricted shares (“RSAs”) to employees pursuant to the Equity Incentive Plan with a concurrent cancelation of options granted to some executive officers in previous quarters. The RSAs will vest over an up to three-year vesting period. RSAs to the directors of the Company, had been subject, in addition to the conditions set forth above, to the approval of the amended compensation policy in the annual general meeting of the shareholders of the Company, which was occurred on December 2, 2021. See also Note 19.
The Company does not plan to issue any additional securities under its 2001 Stock Option Plan. The company granted RSAs, among others, to some executive officers in exchange for their agreement to forfeit their outstanding options that were granted under the 2001 Stock Option Plan. The cancelation of the existing equity-classified award along with a concurrent grant of a replacement award, was accounted for as a modification. The modification amount resulted in an insignificant incremental fair value.
The fair value of each RSA granted to employees was calculated based on the intrinsic value on the grant date.
The Company’s RSA activity during 2021 and information as to RSAs outstanding and RSAs exercisable as of December 31, 2021 is summarized in the following table:
Weighted | ||||||||||||
Number of | average exercise | Aggregate | ||||||||||
RSAs outstanding | price per share | intrinsic value | ||||||||||
Outstanding – December 31, 2020 | - | $ | - | |||||||||
RSAs granted | 2,985,500 | 0.03 | ||||||||||
Outstanding – December 31, 2021 | 2,985,500 | $ | 0.03 | $ | 269 | |||||||
Exercisable as of: | ||||||||||||
December 31, 2021 | 189,682 | $ | 0.03 | $ | 17 |
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 12 – Equity (cont’d)
D. | Equity Incentive Plan (cont’d) |
The weighted average grant date fair value of RSAs granted is $0.13 per RSA during 2021.
The following table summarizes information about RSAs outstanding and exercisable as of December 31, 2021:
RSAs outstanding | RSAs exercisable | |||||||||||||||||
Number | Number | |||||||||||||||||
outstanding | Weighted | Outstanding | Weighted | |||||||||||||||
as of | Average | As of | Average | |||||||||||||||
December 31, | Exercise | December 31, | Exercise | |||||||||||||||
Range of exercise price | 2021 | Price | 2021 | Price | ||||||||||||||
$ | 0.03 | 2,985,500 | $ | 0.03 | 189,682 | $ | 0.03 |
As of December 31, 2021, there was $376 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 1.39 years. The total fair value of shares vested during the year ended December 31, 2021 was $17.
E. | During 2021 and 2020, the Company recorded stock-based compensation expenses in the amount of $100 and $67, respectively, in accordance with ASC Topic 718. |
Stock-based compensation expenses are not deductible for tax purposes.
Note 13 - Income Taxes
A. | The Company and its Israeli subsidiaries |
1. | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985 |
The Company and one of its Israeli subsidiaries are foreign invested companies, and have elected, commencing January 1, 2007, to maintain their books and records in U.S. dollars for income tax purposes, as permitted under the tax regulations.
2. | The Law for the Encouragement of Industry (taxes), 1969 |
The Company believes that it qualifies as an “Industrial Company” under the Law for the Encouragement of Industry. The principal tax benefits for the Company are the deductibility of costs in connection with public offerings and amortization of certain intangibles.
3. | Corporate tax rate |
The statutory tax rate in Israel is 23% during the years 2020 and 2021.
Current and deferred taxes for the reported periods are calculated according to this tax rate mentioned above.
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 13 - Income Taxes (cont’d)
A. | The Company and its Israeli subsidiaries (cont’d) |
4. | Benefits under the Law for the Encouragement of Capital Investments |
According to the Law for the Encouragement of Capital Investments – 1959 (the “Law”), as amended, two new tax tracks exist, one of which may be relevant to the Company, the preferred enterprise track, which mainly provides a uniform and reduced tax rate for all the Company’s income entitled to benefits. According to the amended law, the tax rates on income derived by preferred companies are as follows: 7.5% for Development Area A and 16% for the rest of the country. Additional amendments to the Law became effective in January 2017 (the “2017 Amendment”), according to which, subject to certain conditions, income derived by preferred companies which will meet the definition of ‘Preferred Technological Enterprises’ or “PTE” (as defined in the 2017 Amendment), would be subject to reduced corporate tax rates of 7.5% in Development Area A and 12% for the rest of the country.
In addition to the aforesaid beneficial tax rates, preferred companies in Development Area A are entitled to grants track.
The Law also provides that no tax will apply to a dividend distributed out of preferred income to a shareholder that is an Israeli resident company. A tax rate of 20% shall apply to a dividend distributed out of preferred income to an individual shareholder or foreign resident, subject to double taxation prevention treaties.
The Company currently meets the conditions provided in the Law for inclusion in the scope of the preferred enterprise track.
B. | Non-Israeli subsidiaries are taxed based on the income tax laws in their country of residence. |
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 13 - Income Taxes (cont’d)
C. | Deferred tax assets and liabilities: |
December 31 | December 31 | |||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Carryforward losses | $ | 48,722 | $ | 47,132 | ||||
Other | 863 | 812 | ||||||
Total gross deferred tax assets | 49,585 | 47,944 | ||||||
Less – valuation allowance | (49,585 | ) | (47,944 | ) | ||||
Net deferred tax assets | $ | - | $ | - | ||||
Deferred tax liability - | ||||||||
Net deferred tax liability (*) | $ | - | $ | (*) - |
(*) | Excluding deferred tax liability held for sale. |
The net changes in the total valuation allowance for each of the years ended December 31, 2021 and 2020, are comprised as follows:
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Balance at beginning of year | $ | 47,944 | $ | 46,868 | ||||
Additions during the year from Continuing operations | 1,496 | 1,039 | ||||||
Discontinued operations - see Note 1B | 139 | 57 | ||||||
Tax from previous years | (39 | ) | (39 | ) | ||||
Exchange rate differences on carryforward losses | - | 3 | ||||||
Deferred intercompany transactions | 45 | 32 | ||||||
Other changes | - | (16 | ) | |||||
Balance at end of year | $ | 49,585 | $ | 47,944 |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences or carry-forwards are deductible. Based on the level of historical taxable losses, management has reduced the deferred tax assets with a valuation allowance to the amount it believes is more likely than not to be realized.
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 13 - Income Taxes (cont’d)
D. | As of December 31, 2021, the operating loss carry-forwards and capital loss carryforwards relating to Israeli companies amounted to $170,853 and $37,572, respectively. Operating losses in Israel may be carried forward indefinitely to offset against future taxable operational income. Under the Income Tax (Inflationary Adjustments) Law, 1985, and based on the Company’s election (see Note 13A(1)), tax loss carry-forwards are denominated in U.S. dollars. |
Net operating carry-forward losses relating to non-Israeli companies aggregate $3,512, which will expire as follows:
2027 - $2,701.
2028 - $533.
Indefinitely - $278.
E. | The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries that arose in 2021 and prior years, because the Company considers these earnings to be indefinitely reinvested. These undistributed earnings will be taxed upon distribution, if at all. A deferred tax liability will be recognized when the Company can no longer demonstrate that it plans to indefinitely reinvest these undistributed earnings. As of December 31, 2021, the undistributed earnings of these foreign subsidiaries were $1,636. It is impracticable to determine the additional taxes payable when these earnings are remitted. |
F. | Income tax expenses allocated to continuing operations are as follows: |
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Current income tax expenses | $ | - | $ | - | ||||
Current income tax expenses from previous years | - | (26 | ) | |||||
Deferred tax benefit | 13 | 36 | ||||||
Income tax benefit, net | $ | 13 | $ | 10 |
The net loss of discontinued operations for the year ended December 31, 2021 includes income tax benefits of $76. The net loss from discontinued operations for the year ended December 31, 2020 included income tax benefits of $202.
F-41
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 13 - Income Taxes (cont’d)
F. | Cont’d |
Reported income tax benefit for the years ended December 31, 2021 and 2020 differed from the amounts that would result from applying the Israeli statutory tax rate of 23%, to loss from continuing operations before taxes on income, as a result of the following:
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Computed “expected” income tax benefit | $ | 2,323 | $ | 1,162 | ||||
Decrease in income tax benefit resulting from: | ||||||||
Change in valuation allowance, net | (1,496 | ) | (1,039 | ) | ||||
Nondeductible stock-based compensation related to options and RSAs issued to employees | (23 | ) | (15 | ) | ||||
Nondeductible expenses related to convertible short-term loan from shareholders, including a controlling shareholder | (826 | ) | - | |||||
Other nondeductible expenses | (8 | ) | (50 | ) | ||||
Tax from previous years | - | (26 | ) | |||||
Other | 43 | (22 | ) | |||||
Reported income tax benefit | $ | 13 | $ | 10 |
G. | Loss from continuing operations before taxes on income consists of the following: |
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Israel | $ | (8,516 | ) | $ | (4,765 | ) | ||
Non-Israel | (1,586 | ) | (285 | ) | ||||
$ | (10,102 | ) | $ | (5,050 | ) |
H. | Unrecognized tax benefits |
As of December 31, 2021 and 2020, the Company did not have any significant unrecognized tax benefits. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
For the years ended December 31, 2021 and 2020, no material interest and penalties related to unrecognized tax benefits have been accrued.
The Company and its major subsidiaries file income tax returns in Israel and South Africa. With few exceptions, the income tax returns of the Company and its major subsidiaries are open to examination by the Israeli and the respective foreign tax authorities for the tax years beginning in 2017.
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 14 – Discontinued operations
A. | As described in Note 1B, 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:
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Revenues | $ | 488 | $ | 2,817 | ||||
Expenses | (1,136 | ) | (3,910 | ) | ||||
Other loss, net | (*)(922 | ) | - | |||||
Net loss from discontinued operations | $ | (1,570 | ) | $ | (1,093 | ) |
(*) | Mainly including net loss of $177 due to the legal proceedings, as mentioned in Note 10D(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). |
B. | The following table summarizes information about assets and liabilities from discontinued operations held for sale as of December 31, 2021 and 2020: |
December 31 | ||||||||
Assets held for sale from discontinued operations: | 2021 | 2020 | ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | - | $ | 1,017 | ||||
Trade receivables, net of allowance for doubtful accounts of $42 | - | 409 | ||||||
Other receivables and prepaid expenses | - | 454 | ||||||
Inventories | - | 392 | ||||||
Property, plant and equipment, net | - | 3,136 | ||||||
Intangible assets, net | - | 370 | ||||||
Right-of-use assets due to operating leases | - | 580 | ||||||
- | 6,358 |
Liabilities held for sale from discontinued operations: | ||||||||
Current liabilities: | ||||||||
Short-term bank credit and current maturities of long-term loans | - | 2,339 | ||||||
Trade payables | - | 1,832 | ||||||
Other current liabilities | - | 443 | ||||||
Long-term loans, net of current maturities (*) | - | 642 | ||||||
Long-term liabilities due to operating leases, net of current maturities (*) | - | 401 | ||||||
Deferred tax liability | - | 172 | ||||||
$ | - | $ | 5,829 |
(*) | Those liabilities were received for a long-term loans (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. |
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 15 – Segment reporting
In view of how the Company’s chief operating decision maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance, the Company currently reports two segments which are the Group’s strategic business units: (a) Retail, and (b) Petroleum.
The following summary describes the operations in each of the Group’s operating segments:
● | Retail - includes selling and marketing a variety of products for cashless payment solutions for the retail market. |
● | Petroleum - includes manufacturing and selling of fuel payment and management solutions. The Group’s solution is a wireless, cashless, cardless and paperless refueling tracking and payment solution, providing customers with maximum flexibility and security. |
The strategic business unit’s allocation of resources and evaluation of performance are managed separately. The CODM does not examine assets or liabilities for those segments and therefore they are not presented. Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.
Year ended December 31, 2021 | ||||||||||||
Retail | Petroleum | Consolidated | ||||||||||
Revenues | $ | 12,223 | $ | 2,652 | $ | 14,875 | ||||||
Reportable segment gross profit (*) | 2,711 | 1,354 | 4,065 | |||||||||
Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||
Depreciation | (31 | ) | ||||||||||
Stock-based compensation | (7 | ) | ||||||||||
Gross profit for the period | $ | 4,027 |
Year ended December 31, 2020 | ||||||||||||
Retail | Petroleum | Consolidated | ||||||||||
Revenues | $ | 10,174 | $ | 2,568 | $ | 12,742 | ||||||
Reportable segment gross profit (*) | 4,118 | 1,021 | 5,139 | |||||||||
Reconciliation of reportable segment | ||||||||||||
gross profit to gross profit for the period | ||||||||||||
Depreciation | (34 | ) | ||||||||||
Stock-based compensation | (4 | ) | ||||||||||
Gross profit for the period | $ | 5,101 |
(*) | Gross profit as reviewed by the CODM represents gross profit, adjusted to exclude depreciation and stock-based compensation. |
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On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 16 - Geographic Information and Major Customer
The data is presented in accordance with ASC Topic 280, “Segment reporting.”
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
Revenues by geographical areas from external customers | ||||||||
Americas | $ | 7,202 | $ | 4,574 | ||||
Asia | 1,836 | 2,415 | ||||||
Africa | 1,502 | 1,520 | ||||||
Europe | 4,335 | 4,233 | ||||||
Total export | $ | 14,875 | $ | 12,742 |
December 31 | December 31 | |||||||
2021 | 2020 | |||||||
Long lived assets by geographical areas (excluding assets held for sale) | ||||||||
Domestic (Israel) | $ | 2,691 | $ | 3,538 | ||||
Poland (As of December 31, 2020 - Excluding assets held for sale) | 41 | 40 | ||||||
South Africa | 235 | 322 | ||||||
America | 2 | 2 | ||||||
$ | 2,969 | $ | 3,902 |
Major Customers
Year ended December 31 | ||||||||
2021 | 2020 | |||||||
% | % | |||||||
Major Customers by percentage from total revenues | ||||||||
Customer A | 22 | % | 19 | % | ||||
The revenues derived from this customer are presented within the revenues from the Retail segment.
F-45
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 17 - Leases
The Company leases a limited number of assets, mainly offices and cars for use in its operations.
The Company includes renewal options that it is reasonably certain to exercise in the measurement of the lease liabilities. The remaining operating lease periods of the leases range from less than one year to eight years as of December 31, 2021. The weighted average remaining lease term is 3.2 years as of December 31, 2021.
The following is a schedule of the maturities of operating lease liabilities for the next five years as of December 31, 2021, and thereafter, as were taken into account in the calculation of the operating lease liabilities as of December 31, 2021:
2022 | $ | 823 | ||
2023 | 403 | |||
2024 | 273 | |||
2025 | 267 | |||
2026 | 267 | |||
Thereafter | 800 | |||
Total leases payments | 2,833 | |||
Less - discount | 492 | |||
Operating lease liabilities | $ | 2,341 |
As of December 31, 2021, the weighted average discount rate of those operating leases is approximately 5.2% (as of December 31, 2020 – 5.4%).
Operating lease costs and cash paid for amounts included in the measurement of the lease liabilities, excluding liabilities held for sale, were approximately $968 and $913, respectively, during the year ended December 31, 2021. Operating lease costs and cash paid for amounts included in the measurement of the lease liabilities, excluding liabilities held for sale, were approximately $906 and $868, respectively, during the year ended December 31, 2020. Operating lease costs include fixed payments and variable payments that depend on an index or rate. There are no other significant variable lease payments.
The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.
Note 18 – Related party
Regarding to transactions and balances with a related party, Ivy, as of December 31, 2021, see Notes 9 and 12A.
Note 19 – Subsequent events
A. | See Note 1A and 2A. |
B. | On March 7, 2022, the Company granted 255,000 RSAs that will vest in three equal instalments in February 12, 2022, 2023, and 2024, all subject to the terms and provisions of the Company’s Equity Incentive Plan, as mentioned in Note 12D. |
F-46