UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from
__________ to __________
Commission file number 000-49877
| ON TRACK INNOVATIONS LTD. |
| (Exact name of registrant as specified in its charter) |
| Israel | N/A | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
Box | 2069200 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: + 972-4-6868000
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 41,324,37753,824,377 Ordinary Shares outstanding as of November 5, 2019.August 7, 2020.
ON TRACK INNOVATIONS LTD.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of SeptemberJune 30, 20192020
(Unaudited)
1
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Financial Statements as of SeptemberJune 30, 20192020
Contents
F-1
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
US dollars in thousands except share and per share data
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 3,396 | $ | 4,827 | $ | 3,368 | $ | 2,543 | ||||||||
| Short-term investments | 1,905 | 1,078 | 1,805 | 2,305 | ||||||||||||
| Trade receivables (net of allowance for doubtful accounts of $558 and $555 as of September 30, 2019 and December 31, 2018, respectively) | 2,469 | 4,530 | ||||||||||||||
| Trade receivables (net of allowance for doubtful accounts of $810 and $612 as of June 30, 2020 and December 31, 2019, respectively) | 2,291 | 2,430 | ||||||||||||||
| Other receivables and prepaid expenses | 1,602 | 2,060 | 1,394 | 1,822 | ||||||||||||
| Inventories | 4,366 | 3,527 | 3,147 | 3,332 | ||||||||||||
| Total current assets | 13,738 | 16,022 | 12,005 | 12,432 | ||||||||||||
| Long-term restricted deposit for employees benefit | 473 | 451 | ||||||||||||||
| Long term restricted deposit for employee benefits | 474 | 477 | ||||||||||||||
| Severance pay deposits | 404 | 375 | 382 | 383 | ||||||||||||
| Property, plant and equipment, net | 3,693 | 5,033 | 3,434 | 3,694 | ||||||||||||
| Intangible assets, net | 246 | 241 | 746 | 733 | ||||||||||||
| Right-of-use assets | 1,930 | - | ||||||||||||||
| Right-of-use assets due to operating leases | 3,837 | 2,134 | ||||||||||||||
| Total Assets | $ | 20,484 | $ | 22,122 | $ | 20,878 | $ | 19,853 | ||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-2
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
US dollars in thousands except share and per share data
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Liabilities and Equity | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Short-term bank credit and current maturities of long-term bank loans | $ | 2,553 | $ | 260 | ||||||||||||
| Short-term bank credit and loans and current maturities of long-term bank loans | $ | 2,478 | $ | 2,478 | ||||||||||||
| Trade payables | 4,857 | 4,712 | 4,086 | 4,126 | ||||||||||||
| Other current liabilities | 2,286 | 3,622 | 2,474 | 3,054 | ||||||||||||
| Total current liabilities | 9,696 | 8,594 | $ | 9,038 | $ | 9,658 | ||||||||||
| Long-Term Liabilities | ||||||||||||||||
| Long-term loans, net of current maturities | 26 | 39 | 825 | 22 | ||||||||||||
| Long-term liabilities due to operating leases, net of current maturities | 1,204 | - | 2,938 | 1,483 | ||||||||||||
| Accrued severance pay | 948 | 853 | 894 | 884 | ||||||||||||
| Deferred tax liability | 393 | 445 | 341 | 416 | ||||||||||||
| Total long-term liabilities | 2,571 | 1,337 | 4,998 | 2,805 | ||||||||||||
| Total Liabilities | 12,267 | 9,931 | 14,036 | 12,463 | ||||||||||||
| Commitments and Contingencies | ||||||||||||||||
| Commitments and Contingencies, see Note 7 | ||||||||||||||||
| Equity | ||||||||||||||||
| Shareholders’ Equity | ||||||||||||||||
| Ordinary shares of NIS 0.1 par value: | ||||||||||||||||
| Authorized: 50,000,000 shares as of September 30, 2019 and December 31, 2018; issued: 42,503,076 and 42,473,076 shares as of September 30, 2019 and December 31, 2018, respectively; outstanding: 41,324,377 and 41,294,377 shares as of September 30, 2019, and December 31, 2018, respectively | 1,069 | 1,068 | ||||||||||||||
| Ordinary shares of NIS 0.1 par value: Authorized – 100,000,000 and 50,000,000 shares as of June 30, 2020 and December 31, 2019, respectively; issued: 55,003,076 and 47,963,076 shares as of June 30, 2020 and December 31, 2019, respectively; outstanding: 53,824,377 and 46,784,377 shares as of June 30, 2020 and December 31, 2019, respectively | 1,423 | 1,226 | ||||||||||||||
| Additional paid-in capital | 225,117 | 225,022 | 227,170 | 225,970 | ||||||||||||
| Treasury shares at cost - 1,178,699 shares as of September 30, 2019 and December 31, 2018 | (2,000 | ) | (2,000 | ) | ||||||||||||
| Treasury shares at cost - 1,178,699 shares as of June 30, 2020 and December 31, 2019 | (2,000 | ) | (2,000 | ) | ||||||||||||
| Accumulated other comprehensive loss | (1,172 | ) | (956 | ) | (1,127 | ) | (974 | ) | ||||||||
| Accumulated deficit | (214,797 | ) | (210,943 | ) | (218,624 | ) | (216,832 | ) | ||||||||
| Total Equity | 8,217 | 12,191 | 6,842 | 7,390 | ||||||||||||
| Total Liabilities and Equity | $ | 20,484 | $ | 22,122 | $ | 20,878 | $ | 19,853 | ||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-3
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Operations
US dollars in thousands except share and per share data
| Three months ended September 30, | Nine months ended September 30, | Three Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
| 2019 | *2018 | 2019 | *2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Sales | $ | 2,631 | $ | 4,760 | $ | 7,286 | $ | 13,353 | $ | 3,998 | $ | 2,933 | $ | 7,394 | $ | 4,655 | ||||||||||||||||
| Licensing and transaction fees | 1,234 | 1,339 | 3,708 | 3,997 | 855 | 1,183 | 1,910 | 2,474 | ||||||||||||||||||||||||
| Total revenues | 3,865 | 6,099 | 10,994 | 17,350 | 4,853 | 4,116 | 9,304 | 7,129 | ||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||||||||||
| Cost of sales | 2,161 | 2,870 | 5,273 | 8,351 | 2,965 | 1,742 | 5,238 | 3,112 | ||||||||||||||||||||||||
| Total cost of revenues | 2,161 | 2,870 | 5,273 | 8,351 | 2,965 | 1,742 | 5,238 | 3,112 | ||||||||||||||||||||||||
| Gross profit | 1,704 | 3,229 | 5,721 | 8,999 | 1,888 | 2,374 | 4,066 | 4,017 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Research and development | 840 | 765 | 2,528 | 2,391 | 904 | 817 | 1,802 | 1,688 | ||||||||||||||||||||||||
| Selling and marketing | 1,193 | 1,591 | 3,798 | 4,700 | 1,193 | 1,320 | 2,355 | 2,605 | ||||||||||||||||||||||||
| General and administrative | 1,070 | 1,099 | 3,081 | 3,001 | 775 | 1,046 | 1,732 | 2,011 | ||||||||||||||||||||||||
| Other (gain) expenses, net | (335 | ) | - | (335 | ) | 70 | ||||||||||||||||||||||||||
| Total operating expenses | 2,768 | 3,455 | 9,072 | 10,162 | 2,872 | 3,183 | 5,889 | 6,304 | ||||||||||||||||||||||||
| Operating loss from continuing operations | (1,064 | ) | (226 | ) | (3,351 | ) | (1,163 | ) | (984 | ) | (809 | ) | (1,823 | ) | (2,287 | ) | ||||||||||||||||
| Financial expenses, net | (93 | ) | (2 | ) | (199 | ) | (129 | ) | ||||||||||||||||||||||||
| Financial (expenses) income, net | (123 | ) | (37 | ) | 45 | (106 | ) | |||||||||||||||||||||||||
| Loss from continuing operations before taxes on income | (1,157 | ) | (228 | ) | (3,550 | ) | (1,292 | ) | (1,107 | ) | (846 | ) | (1,778 | ) | (2,393 | ) | ||||||||||||||||
| Income tax (expenses) benefit, net | (17 | ) | 2 | (25 | ) | 267 | ||||||||||||||||||||||||||
| Net loss from continuing operations | (1,174 | ) | (226 | ) | (3,575 | ) | (1,025 | ) | ||||||||||||||||||||||||
| Net (loss) income from discontinued operations | (36 | ) | 42 | (279 | ) | 228 | ||||||||||||||||||||||||||
| Income tax benefits (expenses) | 16 | (3 | ) | 29 | (8 | ) | ||||||||||||||||||||||||||
| Loss from continuing operations | (1,091 | ) | (849 | ) | (1,749 | ) | (2,401 | ) | ||||||||||||||||||||||||
| Loss from discontinued operations | (32 | ) | (50 | ) | (43 | ) | (243 | ) | ||||||||||||||||||||||||
| Net loss | (1,210 | ) | (184 | ) | (3,854 | ) | (797 | ) | $ | (1,123 | ) | $ | (899 | ) | $ | (1,792 | ) | $ | (2,644 | ) | ||||||||||||
| Basic and diluted net (loss) income attributable to shareholders per ordinary share | ||||||||||||||||||||||||||||||||
| Basic and diluted net loss attributable to shareholders per ordinary share | ||||||||||||||||||||||||||||||||
| From continuing operations | (0.03 | ) | (** | ) | (0.09 | ) | (0.02 | ) | (0.02 | ) | (0.02 | ) | (0.04 | ) | (0.06 | ) | ||||||||||||||||
| From discontinued operations | (** | ) | (** | ) | (** | ) | (** | ) | * | * | * | * | ||||||||||||||||||||
| $ | (0.03 | ) | $ | (** | ) | $ | (0.09 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.06 | ) | |||||||||
| Weighted average number of ordinary shares used in computing basic and diluted net (loss) income per ordinary share | 41,324,377 | 41,294,377 | 41,306,575 | 41,260,426 | ||||||||||||||||||||||||||||
| Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share | 52,706,135 | 41,300,641 | 50,248,113 | 41,297,526 | ||||||||||||||||||||||||||||
| Less than $0.01 per ordinary share. |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statementsstatements.
F-4
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Comprehensive (Loss) IncomeLoss
US dollars in thousands
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Total comprehensive (loss) income: | ||||||||||||||||
| Net (loss) income | $ | (1,210 | ) | $ | (184 | ) | $ | (3,854 | ) | $ | (797 | ) | ||||
| Foreign currency translation adjustments | (254 | ) | 44 | (216 | ) | (210 | ) | |||||||||
| Total comprehensive (loss) income | $ | (1,464 | ) | $ | (140 | ) | $ | (4,070 | ) | $ | (1,007 | ) | ||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Total comprehensive loss: | ||||||||||||||||
| Net loss | $ | (1,123 | ) | $ | (899 | ) | $ | (1,792 | ) | $ | (2,644 | ) | ||||
| Foreign currency translation adjustments | 141 | 101 | (153 | ) | 38 | |||||||||||
| Total comprehensive loss | $ | (982 | ) | $ | (798 | ) | $ | (1,945 | ) | $ | (2,606 | ) | ||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-5
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Changes in Equity
US dollars in thousands except for number of shares
| Accumulated | Accumulated other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Treasury | other | Number of | Additional | Treasury | comprehensive | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Share | paid-in | Shares | comprehensive | Accumulated | Total | Shares | Share | paid-in | Shares | Income | Accumulated | Total | |||||||||||||||||||||||||||||||||||||||||||
| Shares issued | capital | capital | (at cost) | Income (loss) | deficit | equity | issued | capital | capital | (at cost) | (loss) | deficit | equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2018 | 42,473,076 | $ | 1,068 | $ | 224,903 | $ | (2,000 | ) | $ | (945 | ) | $ | (211,293 | ) | $ | 11,733 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2019 | 42,473,076 | $ | 1,068 | $ | 225,068 | $ | (2,000 | ) | $ | (1,019 | ) | $ | (212,688 | ) | $ | 10,429 | ||||||||||||||||||||||||||||||||||||||||
| Changes during the three months period ended September 30, 2018: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 65 | - | - | - | 65 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 44 | - | 44 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (184 | ) | (184 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2018 | 42,473,076 | $ | 1,068 | $ | 224,968 | $ | (2,000 | ) | $ | (901 | ) | $ | (211,477 | ) | $ | 11,658 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2019 | 42,503,076 | $ | 1,069 | $ | 225,111 | $ | (2,000 | ) | $ | (918 | ) | $ | (213,587 | ) | $ | 9,675 | ||||||||||||||||||||||||||||||||||||||||
| Changes during the three months period ended September 30, 2019: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes during the three months period ended June 30, 2019: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 6 | - | - | - | 6 | 30,000 | (*) | 1 | 43 | - | - | - | 44 | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | (254 | ) | - | (254 | ) | - | - | - | - | 101 | - | 101 | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,210 | ) | (1,210 | ) | - | - | - | - | - | (899 | ) | (899 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | 42,503,076 | $ | 1,069 | $ | 225,117 | $ | (2,000 | ) | $ | (1,172 | ) | $ | (214,797 | ) | $ | 8,217 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2019 | 42,503,076 | $ | 1,069 | $ | 225,111 | $ | (2,000 | ) | $ | (918 | ) | $ | (213,587 | ) | $ | 9,675 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | 49,003,076 | $ | 1,256 | $ | 226,152 | $ | (2,000 | ) | $ | (1,268 | ) | $ | (217,501 | ) | $ | 6,639 | ||||||||||||||||||||||||||||||||||||||||
| Changes during the three months period ended June 30, 2020: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $31 | 6,000,000 | (**) | 167 | 1,002 | - | - | - | 1,169 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 16 | - | - | - | 16 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 141 | - | 141 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,123 | ) | (1,123 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,170 | $ | (2,000 | ) | $ | (1,127 | ) | $ | (218,624 | ) | $ | 6,842 | ||||||||||||||||||||||||||||||||||||||||
| (*) | See Note |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Changes in Equity
US dollars in thousands except number of shares
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Treasury | other | ||||||||||||||||||||||||||
| Number of | Share | paid-in | Shares | comprehensive | Accumulated | Total | ||||||||||||||||||||||
| Shares issued | capital | capital | (at cost) | Income (loss) | deficit | equity | ||||||||||||||||||||||
| Balance as of December 31, 2017 | 42,353,077 | $ | 1,064 | $ | 224,758 | $ | (2,000 | ) | $ | (691 | ) | $ | (210,680 | ) | $ | 12,451 | ||||||||||||
| Changes during the nine month period ended September 30, 2018: | ||||||||||||||||||||||||||||
| Stock-based compensation | 80,000 | (*) | 3 | 177 | - | - | - | 180 | ||||||||||||||||||||
| Exercise of options | 39,999 | 1 | 33 | - | - | - | 34 | |||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | (210 | ) | - | (210 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (797 | ) | (797 | ) | |||||||||||||||||||
| Balance as of September 30, 2018 | 42,473,076 | $ | 1,068 | $ | 224,968 | $ | (2,000 | ) | $ | (901 | ) | $ | (211,477 | ) | $ | 11,658 | ||||||||||||
| Balance as of December 31, 2018 | 42,473,076 | $ | 1,068 | $ | 225,022 | $ | (2,000 | ) | $ | (956 | ) | $ | (210,943 | ) | $ | 12,191 | ||||||||||||
| Changes during the nine month period ended September 30, 2019: | ||||||||||||||||||||||||||||
| Stock-based compensation | 30,000 | (*) | 1 | 95 | - | - | - | 96 | ||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | (216 | ) | - | (216 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (3,854 | ) | (3,854 | ) | |||||||||||||||||||
| Balance as of September 30, 2019 | 42,503,076 | $ | 1,069 | $ | 225,117 | $ | (2,000 | ) | $ | (1,172 | ) | $ | (214,797 | ) | $ | 8,217 | ||||||||||||
| (**) | See Note |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-6
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash FlowsChanges in Equity
US dollars in thousands except for number of shares
| Nine months ended September 30, | ||||||||
| 2019 | *2018 | |||||||
| Cash flows from continuing operating activities | ||||||||
| Net loss from continuing operations | $ | (3,575 | ) | $ | (1,025 | ) | ||
| Adjustments required to reconcile net loss to net cash used in continuing operating activities: | ||||||||
| Stock-based compensation related to options and shares issued to employees and others | 96 | 180 | ||||||
| Depreciation and amortization | 951 | 978 | ||||||
| Deferred tax, net | (25 | ) | (360 | ) | ||||
| Gain on sale of property and equipment | (328 | ) | (25 | ) | ||||
| Accrued interest and linkage differences, net | (48 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accrued severance pay, net | 66 | (19 | ) | |||||
| Decrease in trade receivables, net | 1,576 | 1,377 | ||||||
| Decrease (increase) in other receivables and prepaid expenses | 395 | (255 | ) | |||||
| Increase in inventories | (879 | ) | (381 | ) | ||||
| Increase (decrease) in trade payables | 506 | (263 | ) | |||||
| Decrease in other current liabilities | (585 | ) | (151 | ) | ||||
| Net cash (used in) provided by continuing operating activities | (1,850 | ) | 56 | |||||
| Cash flows from continuing investing activities | ||||||||
| Purchase of property and equipment | (433 | ) | (467 | ) | ||||
| Proceeds from sale of property and equipment | 1,102 | 52 | ||||||
| Change in short-term investments, net | (978 | ) | 1,195 | |||||
| Investment in capitalized certification costs | (156 | ) | (92 | ) | ||||
| Proceeds from restricted deposit for employees benefit | 10 | 8 | ||||||
| Net cash (used in) provided by continuing investing activities | (455 | ) | 696 | |||||
| Cash flows from continuing financing activities | ||||||||
| Increase (decrease) in short-term bank credit, net | 2,636 | (3,449 | ) | |||||
| Repayment of long-term bank loans | (261 | ) | (979 | ) | ||||
| Proceeds from exercise of options and warrants | - | 34 | ||||||
| Net cash provided by (used in) continuing financing activities | 2,375 | (4,394 | ) | |||||
| Cash flows from discontinued operations | ||||||||
| Net cash (used in) provided by discontinued operating activities | (1,397 | ) | 836 | |||||
| Total net cash (used in) provided by discontinued operations | (1,397 | ) | 836 | |||||
| Effect of exchange rate changes on cash and cash equivalents | (277 | ) | (187 | ) | ||||
| Decrease in cash, cash equivalents and restricted cash | (1,604 | ) | (2,993 | ) | ||||
| Cash, cash equivalents and restricted cash - beginning of the period | 5,105 | 7,799 | ||||||
| Cash, cash equivalents and restricted cash - end of the period | $ | 3,501 | $ | 4,806 | ||||
| Accumulated other | ||||||||||||||||||||||||||||
| Number of | Additional | Treasury | comprehensive | |||||||||||||||||||||||||
| Shares | Share | paid-in | Shares | Income | Accumulated | Total | ||||||||||||||||||||||
| issued | capital | capital | (at cost) | (loss) | deficit | equity | ||||||||||||||||||||||
| Balance as of December 31, 2018 | 42,473,076 | $ | 1,068 | $ | 225,022 | $ | (2,000 | ) | $ | (956 | ) | $ | (210,943 | ) | $ | 12,191 | ||||||||||||
| Changes during the six months period ended June 30, 2019: | ||||||||||||||||||||||||||||
| Stock-based compensation | 30,000 | (*) | 1 | 89 | - | - | - | 90 | ||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 38 | - | 38 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,644 | ) | (2,644 | ) | |||||||||||||||||||
| Balance as of June 30, 2019 | 42,503,076 | $ | 1,069 | $ | 225,111 | $ | (2,000 | ) | $ | (918 | ) | $ | (213,587 | ) | $ | 9,675 | ||||||||||||
| Balance as of December 31, 2019 | 47,963,076 | $ | 1,226 | $ | 225,970 | $ | (2,000 | ) | $ | (974 | ) | $ | (216,832 | ) | $ | 7,390 | ||||||||||||
| Changes during the six months period ended June 30, 2020: | ||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs of $39 | 7,040,000 | (**) | 197 | 1,172 | - | - | - | 1,369 | ||||||||||||||||||||
| Stock-based compensation | - | - | 28 | - | - | - | 28 | |||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | (153 | ) | - | (153 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (1,792 | ) | (1,792 | ) | |||||||||||||||||||
| Balance as of June 30, 2020 | 55,003,076 | $ | 1,423 | $ | 227,170 | $ | (2,000 | ) | $ | (1,127 | ) | $ | (218,624 | ) | $ | 6,842 | ||||||||||||
| (*) |
| (**) | See Note 11A. |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-7
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont’d)
US dollars in thousands
| Nine months ended September 30, | Six months ended June 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Cash flows from continuing operating activities | ||||||||||||||||
| Net loss from continuing operations | $ | (1,749 | ) | $ | (2,401 | ) | ||||||||||
| Adjustments required to reconcile net loss to net cash used in provided by continuing operating activities: | ||||||||||||||||
| Stock-based compensation related to options issued to employees and others | 28 | 90 | ||||||||||||||
| Accrued interest and linkage differences, net | (162 | ) | (18 | ) | ||||||||||||
| Depreciation and amortization | 604 | 643 | ||||||||||||||
| Deferred tax benefits, net | (58 | ) | (24 | ) | ||||||||||||
| Gain on sale of fixed assets | - | (2 | ) | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Change in accrued severance pay, net | 11 | 44 | ||||||||||||||
| Decrease in trade receivables, net | 101 | 1,254 | ||||||||||||||
| Decrease in other receivables and prepaid expenses | 379 | 597 | ||||||||||||||
| Decrease (increase) in inventories | 174 | (1,405 | ) | |||||||||||||
| Increase in trade payables | 110 | 585 | ||||||||||||||
| Decrease in other current liabilities | (245 | ) | (540 | ) | ||||||||||||
| Net cash used in continuing operating activities | (807 | ) | (1,177 | ) | ||||||||||||
| Cash flows from continuing investing activities | ||||||||||||||||
| Purchase of property and equipment and intangible assets | (490 | ) | (341 | ) | ||||||||||||
| Change in short-term investments, net | 511 | (1,190 | ) | |||||||||||||
| Proceeds from restricted deposit for employee benefits | - | 10 | ||||||||||||||
| Proceeds from sale of property and equipment | - | 10 | ||||||||||||||
| Net cash provided by (used in) continuing investing activities | 21 | (1,511 | ) | |||||||||||||
| Cash flows from continuing financing activities | ||||||||||||||||
| Increase in short-term bank credit and loans, net | 62 | 2,747 | ||||||||||||||
| Proceeds from long-term bank loans | 799 | - | ||||||||||||||
| Repayment of long-term bank loans | (7 | ) | (233 | ) | ||||||||||||
| Proceeds from issuance of shares, net of issuance costs | 1,369 | - | ||||||||||||||
| Net cash provided by continuing financing activities | 2,223 | 2,514 | ||||||||||||||
| Cash flows from discontinued operations | ||||||||||||||||
| Net cash used in discontinued operating activities | (526 | ) | (1,304 | ) | ||||||||||||
| Total net cash used in discontinued operations | (526 | ) | (1,304 | ) | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (86 | ) | 53 | |||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 825 | (1,425 | ) | |||||||||||||
| Cash, cash equivalents and restricted cash-beginning of the period | 2,648 | 5,105 | ||||||||||||||
| Cash, cash equivalents and restricted cash-end of the period | $ | 3,473 | $ | 3,680 | ||||||||||||
| Supplementary cash flows activities: | ||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||
| Interest paid | $ | 44 | $ | 112 | $ | 51 | $ | 19 | ||||||||
| Income taxes paid | $ | 187 | $ | 43 | $ | 40 | $ | 173 | ||||||||
| Supplemental disclosures of non-cash flow information: | ||||||||||||||||
| Payables due to purchase of property and equipment and intangible assets | $ | 87 | $ | - | ||||||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-8
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 1 –- Organization and Basis of Presentation
| A. | Description of business |
On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together, the “Group”) are principally engaged in the field of design and development of cashless payment solutions.
The Company’s ordinary shares are listed for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 30,31, 2019).
At SeptemberJune 30, 2019,2020, the Company operates in two operating segments: (a) Retail and Mass Transit Ticketing, and (b) Petroleum. See Note 11.12. During December 2018, the Company sold its medical smart cards operation – see Note 1C(2).
| B. | Interim Unaudited Financial Information |
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
In the opinion of management, all adjustments considered necessary for a fair statement, consisting of normal recurring adjustments, have been included. Operating results for the ninesix month period and the three month period ended SeptemberJune 30, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Interim Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.
| C. | Divestiture of operations |
| 1. | In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property |
F-9
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 1 –- Organization and Basis of Presentation (cont’d)
| C. | Divestiture of operations (cont’d) |
| 1. | (Cont’d) |
On April 20, 2016, the purchaser of the Smart ID division, SuperCom Ltd. (“SuperCom”), and the Company entered into a settlement agreement resolving certain litigation between SuperCom and the Company pursuant to which SuperCom paid the Company $2,050 and agreed to pay the Company up to $1,500 in accordance with and subject to a certain earn-out mechanism. In November 2017, the Company commenced an arbitration procedure with SuperCom, in which the Company claims that additional earn-out payments have not been paid to the Company. SuperCom raised issuesclaims against the Company during the arbitration procedure. Anfor material damages. The evidence in the arbitration was heard on March 6, 2018, and an arbitration decision was issued on December 24, 2018 in the Company’s favor and denied SuperCom’s claims. The Arbitratorarbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that the Company is entitled to receive, and to pay the Company accordingly, or otherwise pay the Company approximately $1,300 that reflects the maximum earn-out amount which equals $1,500 minusthat has not yet been paid to the earn-out amountsCompany 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 were already paidincludes a final payment by SuperCom (as opposed to the Company. As of the date hereof, the said arbitration verdict has been validated as a court verdict, and the Companymerely disclosing information). A hearing in this procedure is currently taking actions to enforce it.scheduled for August 10, 2020.
The Company records the earn-out payments only when the consideration is determined to be realizable. The Company did not record or receive any contingent consideration during the ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
| 2. | In December 2018, the Company completed the sale of its medical smart cards operation (“Medismart”) (formerly part of the Company’s “Other segment”) to Smart Applications International Limited |
| D. |
The Company has had recurring losses and has an accumulated deficit as of June 30, 2020 of $218,624. The Company also has a payable balance on its short-term loan of $2,478 as of June 30, 2020 that is due within the next 12 months.
Since inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities, borrowings from banks and government, cash from the exercise of options and warrants as well as proceeds from the divestiture of parts of the Company’s businesses. The Company had cash, cash equivalents and short-term investments representing bank deposits of $5,173 (of which an amount of $105 has been pledged as security for certain items) as of June 30, 2020. The Company believes that it has sufficient capital resources to fund its operations for at least the next 12 months.
F-10
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 1 –- Organization and Basis of Presentation (cont’d)
| D. |
Further, as disclosed in Note 11A, during April 2020 the Company received funds in a total amount of $1,200 in consideration for the issuance of 6,000,000 ordinary shares, all in accordance with the terms and provisions of the Agreement (as defined in Note 11A below).
In connection with the outbreak of the Corona Virus (COVID-19) (“COVID-19”), the Company has taken steps to protect its workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include work from home where possible, minimizing face-to-face meetings and utilizing video conference as much as possible, social distancing at facilities and elimination of all international travel. The Company does not record right-of-use asset and operating lease liability regardingcontinues to comply with all local health directives.
So far, the buildingmain direct impact of the COVID-19 pandemic has been a decrease in Yokne’am (Israel), as mentioned above,the Company’s revenues derived from Mass Transit Ticketing sales in its consolidated financial statements asthe Polish market. The revenues from this operation, that were relatively stable during the year preceding the COVID-19 outbreak, decreased by approximately $1,000 in the first half of September 30,2020, compared to the first half of 2019, mainly due to the factlockdown and other restrictions and consequences of the COVID-19 as started in March 2020. This impact is expected to continue for the foreseeable future. As a response to this effect, the Company has taken steps to reduce some costs that are not essential under the current circumstances.
Another impact of COVID-19 has been on product delivery, where components’ procurement lead time is longer and a shortage in components has grown as the duration of the COVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortage in components may continue or get worse. Therefore, the Company maintains a comprehensive network of world-wide suppliers.
Regarding the Company’s Petroleum activity, due to the extended lockdown in South Africa, some of the sales that were planned to occur at the second quarter of 2020 were postponed to the second half of 2020 and therefore caused a decrease in the revenues derived from this segment compared to the second quarter of 2019.
As for the Company’s Retail activity, the Company has seen a higher interest from a growing number of potential customers and partners as they forecasted that the commencementneed for the Company’s products will grow, yet execution of closing is still slow due to the current business environment.
It is difficult to predict what other impacts the COVID-19 pandemic may have on the Company.
Regarding a consent that the Company’s Polish subsidiary received to postpone the maturity date of a secured bank loan, and a long-term loan that it received as part of the lease period is subsequentPolish government assistance and regulations introduced in relation to the balance sheet date –COVID-19, see also Note 2A. The Company expects an increase of approximately $1,6005.
F-11
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in the right-of-use assetsthousands, except share and in the lease liabilities on the first-time-recognition in this lease.per share data
Note 2 –- Significant Accounting Policies
Except as described below, theseThese interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes Accounting Standards Codification (“ASC”) 840, Leases. This ASU requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for most leases, whereas until December 31, 2018, only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Right-of-use assets represent company’s right to use an underlying asset for the lease term and lease liabilities represent company’s obligation to make lease payments arising from the lease. Operating and finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
| 2. | In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This ASU, among other things, removes the exception to the incremental approach for intraperiod allocation of tax expense when a company has a loss from continuing operations and income from other items that are not included in continuing operations, such as income from discontinued operations, or income recorded in other comprehensive income. The general rule under Accounting Standards Update (“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 new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance. |
F-12
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands (except per share amounts)
Note 2 – Significant Accounting Policies (cont’d)US dollars,
In addition, the definition of a lease in the ASU has been revised with respect to when an arrangement conveys the right to control the use of the identified asset under the arrangement, which may result in changes to the classification of an arrangement as a lease. The ASU does not significantly change the lessees’ recognition, measurementNIS and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. The ASU expands the disclosure requirements of lease arrangements.
The Company has adopted ASU 2016-02 commencing from January 1, 2019, under the effective date method.In accordance with the effective date method, comparative periods are not restated, and the Company needs to record a cumulative-effect adjustment within its accumulated deficit in the equity on January 1, 2019, without reclassification of previous financial statements. The new standard provides a number of optional practical expedients in transition. The Company elect the ‘package of practical expedients’, which permits the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard and also elect the practical expedient pertaining to the use-of hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company also elected the practical expedient to not separate lease and non-lease components for all of the Company’s leases, other than leases of real estate. Additionally, following the adoption of the new standard and in subsequent measurements, the Company applies the portfolio approach to account for the operating lease right-of-use assets and liabilities for certain leases and incremental borrowing rates.
The Company did not have a cumulative-effect adjustment to retained earnings as a result of the adoption of the new standard. The adoption of this standard does not have a material impact on the results of operations and cash flows. See Note 5 for the impact on the balance sheet as of September 30, 2019, and additional disclosures, as required by the new standard.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company currently does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements.
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollarsEuro in thousands, (exceptexcept share and per share amounts)data
Note 3 –- Other Receivables and Prepaid Expenses
| June 30, | December 31, | |||||||||||||||
| September 30, | December 31, | 2020 | 2019 | |||||||||||||
| 2019 | 2018 | |||||||||||||||
| Government institutions | $ | 234 | $ | 387 | $ | 261 | $ | 414 | ||||||||
| Prepaid expenses | 165 | 226 | 230 | 224 | ||||||||||||
| Receivables under contractual obligations to be transferred to others (*) | 144 | 330 | ||||||||||||||
| Supplier advances | 502 | 932 | 429 | 544 | ||||||||||||
| Receivables under contractual obligations to be transferred to others (*) | 427 | 349 | ||||||||||||||
| Other receivables | 274 | 166 | 330 | 310 | ||||||||||||
| $ | 1,602 | $ | 2,060 | |||||||||||||
| $ | 1,394 | $ | 1,822 | |||||||||||||
| The Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities. |
Note 4 –- Other Current Liabilities
| June 30, | December 31, | |||||||||||||||
| September 30, | December 31, | 2020 | 2019 | |||||||||||||
| 2019 | 2018 | |||||||||||||||
| Employees and related expenses | $ | 637 | $ | 1,042 | $ | 602 | $ | 613 | ||||||||
| Accrued expenses | 682 | 921 | 813 | 887 | ||||||||||||
| Customer advances | 110 | 141 | 109 | 111 | ||||||||||||
| Short-term liabilities due to operating leases and current maturities ** | 732 | - | ||||||||||||||
| Short-term liabilities due to operating leases and current maturities | 847 | 686 | ||||||||||||||
| Other current liabilities | 125 | *1,518 | 103 | 757 | (*) | |||||||||||
| $ | 2,286 | $ | 3,622 | $ | 2,474 | $ | 3,054 | |||||||||
| * | See Note |
Note 5 - Short-term and long-term bank loans
On May 11, 2020, based on Polish government regulations introduced in relation to the COVID-19 pandemic, ASEC S.A. (Spolka Akcyjna), the Polish subsidiary of the Company (hereinafter – “ASEC”), received the consent of PKO Bank Polski, a Polish bank (hereinafter – “the Lender”), to postpone the maturity date of a secured loan, provided to ASEC in May 2019, in the amount of $2,000, by six months to November 22, 2020 instead of May 23, 2020, as the loan agreement provided. The loan will be payable in full on maturity (with the option of early repayment by ASEC) and the interest of 1-month LIBOR plus 1.8% is paid on a monthly basis. The loan agreement includes customary events of default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the agreement, etc. If an event of default occurs, the Lender may reduce the amount of the loan, demand additional security or terminate the agreement. This loan is presented as a short-term bank loan within ‘current liabilities’. ASEC repaid approximately $156 of this loan during the first half of 2020.
As part of an additional Polish government assistance, ASEC received a long-term loan in an amount of approximately $800 through an other Polish bank in June 2020. Depending on some scenarios, such as average number of employees and financial results, a portion of the loan may be forgiven. The loan will be repaid in 24 monthly equal installments starting in July 2021. This loan is denominated in Polish Zloty and does not bear interest. This loan is presented as a long-term bank loan within ‘long-term liabilities’. In the event of breach by ASEC of any of the obligations, as mentioned in the loan agreement, the bank may terminate such agreement. In such a case, the long-term loan shall become due and payable within 14 business days from receipt of the notice of termination.
F-13
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 6 - Leases
The Company leases a limited number of assets, mainly offices and cars for use in its operations. The Company adopted the new accounting standard ASC 842, “Leases”, and all the related amendments on January 1, 2019 and used the effective date as Company’s date of initial application.
As of SeptemberJune 30, 2019,2020, right-of-use assets due to operating leases are $1,930)as$3,837 (as of January 1,December 31, 2019 - $1,572)$2,134) and the liabilities due to operating leases are $1,936$3,785 (as of January 1,December 31, 2019 - $1,572)$2,169), out of which $1,204$2,938 are classified as long-term liabilities and $732$847 are classified as current liabilities (see Note 4).
The right-of-use assets and the liabilities due to operating leases as of June 30, 2020, include assets and liabilities in the amount of $1,741 and $1,736, respectively, that derive from the lease commencement of the headquarters office in Yokne’am, Israel (in lieu of the previous leased headquarters building in Rosh Pina) in January 2020. The operating lease period of this office is five years (excluding the extension-period, as mentioned in the agreement). The total annual rent expenses of this building, including management fees and excluding construction costs-reimbursement payments, is approximately NIS 595 ($172) during the lease period and approximately NIS 654 ($189) during the extension-period, if extended. The construction costs-reimbursement payments are approximately NIS 2,913 ($840), out of which 50% will be paid during the lease period. If the Company leases this office during the extension-period of five years, the rest of the 50% costs-reimbursement payments will be paid during the extension-period. Otherwise, the rest of the 50% costs-reimbursement payments will be paid at the end of 2024.
The Company includes renewal options that it is reasonably certain to exercise in the measurement of the lease liabilities. The remaining operating lease periods of the leases range from less than one year to sixten years as of SeptemberJune 30, 2019.2020. The weighted average remaining lease term is 2.33.2 years as of SeptemberJune 30, 2019.
F-14
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands (except per share amounts)
Note 5 – Leases (cont’d)2020.
The following is a schedule of the maturities of operating lease liabilities for the next five years as of SeptemberJune 30, 2019,2020, and thereafter, as were taken into account in the calculation of the operating lease liabilities as of SeptemberJune 30, 2019:2020:
| Remainder of 2019 | $ | 233 | ||||||
| 2020 | 661 | |||||||
| Remainder of 2020 | $ | 538 | ||||||
| 2021 | 511 | 1,009 | ||||||
| 2022 | 362 | 783 | ||||||
| 2023 | 184 | 503 | ||||||
| 2024 | 338 | |||||||
| Thereafter | 140 | 1,225 | ||||||
| Total leases payments | 2,091 | 4,396 | ||||||
| Less - discount | 155 | 611 | ||||||
| Operating lease liabilities | $ | 1,936 | $ | 3,785 | ||||
As of SeptemberJune 30, 2019,2020, the weighted average discount rate of the operating leases is approximately 5.3%5%.
Operating lease costs and cash paid during the six months ended June 30, 2020 and 2019, for amounts included in the measurement of the lease liabilities were approximately $236$538 and $602$366, respectively. Operating lease costs and cash paid during the three months ended June 30, 2020 and 2019, for amounts included in the nine months ended September 30, 2019,measurement of the lease liabilities were approximately $276 and $186, respectively. Operating lease costs include fixed payments and variable payments that depend on an index or rate. There are no other significant variable lease payments.
The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.
The following is a schedule of the maturities of operating lease liabilities for the next five years as of December 31, 2018, and thereafter, based on agreements that were signed as of December 31, 2018:
| 2019 | $ | 523 | ||
| 2020 | 350 | |||
| 2021 | 277 | |||
| 2022 | 163 | |||
| 2023 | 140 | |||
| Thereafter | 156 | |||
| Total leases payments | $ | 1,609 |
F-15F-14
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 6 –7 - Commitments and Contingencies
| A. | Legal claims |
| 1. | In June 2013, prior to the Company’s divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liabilities the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions, plus expenses and legal fees, |
The consolidated financial statements as of December 31, 2018, include a provision for the full amount paid. Despite the fact that, based on the assessment of the Company’s external legal counsel, the likelihood to succeed in the arbitration process (or other legal procedure in that matter) is high, the Company did not record an indemnification asset as of SeptemberJune 30, 20192020 and December 31, 2018,2019, in accordance with accounting standard ASC 450.450, “Contingencies”.
| 2. | On June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration, with respect to the additional financial details that Merwell claims that the Company was ordered to provide according to the arbitration verdict from February 21, 2016, and additional payments that Merwell claims that the Company is obligated to pay Merwell. The said financial details refer to the quantity of smart driving licenses that Merwell claims were issued in the later period of a project in Tanzania in which Merwell claims to have provided services to the Company. Merwell claims that despite the Company’s failure to provide the details, Merwell obtained the details independently from other sources, and they indicate that the Company is obligated to pay Merwell an additional amount of |
F-15
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 6 –7 - Commitments and Contingencies (cont’d)
| A. | Legal claims (cont’d) |
| 3. | In October 2013, a financial claim was filed against the Company and its then French subsidiary, Parx France (in this paragraph, together, the “Defendants”), in the Commercial Court of Paris, France (in this paragraph, the “Court”). The sum of the claim is €1,500 (approximately |
| 4. | In July 2019, the Company received a request |
As of September 30, 2019, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $387. The expiration dates of the guarantees range from April 2020 to September 2021.F-16
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 7 –- Commitments and Contingencies (cont’d)
| A. | Legal claims (cont’d) |
On January 26, 2020, Harel and the Company agreed to the offer of the Israeli Supreme Court, as made by way of settlement in which the Company will pay back to Harel the sum of NIS 1,907 (approximately $553) in three monthly equal installments starting February 26, 2020. Accordingly, the Company recorded loss of $71 and $482 within the net loss from continuing operations and within the net loss from discontinued operations, respectively, in the fourth quarter of 2019. As of June 30, 2020, the Company paid all the settlement amount.
| 6. | Regarding an additional legal claim, see Note 1C(1). |
| B. | Guarantees |
As of June 30, 2020, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $495. The expiration dates of these guarantees range from January 2021 to September 2021.
F-17
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 8 - Revenues
Disaggregation of revenue
The following tables disaggregatesdisaggregate the Company’s revenue by major source based on categories that depict its nature and timing as reviewed by management for the nine months and the three months ended SeptemberJune 30, 2019:2020 and 2019:
| Nine months ended September 30,2019 | ||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | 4,437 | $ | - | $ | 4,437 | ||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | 646 | 1,439 | 2,085 | |||||||||
| Licensing fees, transaction fees and services (B2) | 3,522 | 950 | 4,472 | |||||||||
| 4,168 | 2,389 | 6,557 | ||||||||||
| Total revenues | $ | 8,605 | $ | 2,389 | $ | 10,994 | ||||||
| Nine months ended September 30,2018* | Three months ended June 30, | |||||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | 2020 | |||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Cashless payment products (A) | $ | 6,710 | $ | - | $ | 6,710 | $ | 1,843 | $ | - | $ | 1,843 | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||||||||||||||
| Sales of products (B1) | 2,880 | 2,882 | 5,762 | 1,799 | 304 | 2,103 | ||||||||||||||||||
| Licensing fees, transaction fees and services (B2) | 3,817 | 1,061 | 4,878 | 730 | 177 | 907 | ||||||||||||||||||
| 6,697 | 3,943 | 10,640 | 2,529 | 481 | 3,010 | |||||||||||||||||||
| Total revenues | $ | 13,407 | $ | 3,943 | $ | 17,350 | $ | 4,372 | $ | 481 | $ | 4,853 | ||||||||||||
| Three months ended June 30, | ||||||||||||
| 2019 | ||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | 1,901 | $ | - | $ | 1,901 | ||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | 460 | 331 | 791 | |||||||||
| Licensing fees, transaction fees and services (B2) | 1,116 | 308 | 1,424 | |||||||||
| 1,576 | 639 | 2,215 | ||||||||||
| Total revenues | $ | 3,477 | $ | 639 | $ | 4,116 | ||||||
F-18
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 7 –8 - Revenues (cont’d)
Disaggregation of revenue (cont’d)(cont’d)
| Three months ended September 30,2019 | ||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | 1,697 | $ | - | $ | 1,697 | ||||||
| �� | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | 49 | 603 | 652 | |||||||||
| Licensing fees, transaction fees and services (B2) | 1,189 | 327 | 1,516 | |||||||||
| 1,238 | 930 | 2,168 | ||||||||||
| Total revenues | $ | 2,935 | $ | 930 | $ | 3,865 | ||||||
The following tables disaggregate the Company’s revenue by major source based on categories that depict its nature and timing as reviewed by management for the six months ended June 30, 2020 and 2019:
| Three months ended September 30,2018* | Six months ended June 30, | |||||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | 2020 | |||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Cashless payment products (A) | $ | 2,013 | $ | - | $ | 2,013 | $ | 4,312 | $ | - | $ | 4,312 | ||||||||||||
| Complete cashless payment solutions (B): | ||||||||||||||||||||||||
| Sales of products (B1) | 1,520 | 935 | 2,455 | 2,113 | 875 | 2,988 | ||||||||||||||||||
| Licensing fees, transaction fees and services (B2) | 1,248 | 383 | 1,631 | 1,600 | 404 | 2,004 | ||||||||||||||||||
| 2,768 | 1,318 | 4,086 | 3,713 | 1,279 | 4,992 | |||||||||||||||||||
| Total revenues | $ | 4,781 | $ | 1,318 | $ | 6,099 | $ | 8,025 | $ | 1,279 | $ | 9,304 | ||||||||||||
| Six months ended June 30, | ||||||||||||
| 2019 | ||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | 2,740 | $ | - | $ | 2,740 | ||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | 597 | 836 | 1,433 | |||||||||
| Licensing fees, transaction fees and services (B2) | 2,333 | 623 | 2,956 | |||||||||
| 2,930 | 1,459 | 4,389 | ||||||||||
| Total revenues | $ | 5,670 | $ | 1,459 | $ | 7,129 | ||||||
F-19
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 7 –8 - Revenues (cont’d)
Performance obligations
Below is a listing of performance obligations for the Company’s main revenue streams:
| A. | Cashless payment products – |
The performance obligation is the selling of contactless payment products. Most of those products are Near Field Communication (NFC) readers. For such sales the performance obligation, transfer of control and revenue recognition occur when the products are delivered.
Below is a listing of performance obligations for the Company’s main revenue streams (cont’d):
| B. | Complete cashless payment solutions – |
The complete solution includes selling of products and complementary services, as follows:
| 1. | Sales of products– |
| ● | Selling of contactless payment products (see A above) together with payment gateways and machine-to-machine controllers. |
| ● | Selling of petroleum payment solutions including site and vehicle equipment. |
For such sales, the performance obligation, transfer of control and revenue recognition occur when the products are delivered.
| 2. | Licensing fees, transaction fees and services - |
The types of arrangements and their main performance obligations are as follows:
| ● | To provide terminal management system licensing for software that is responsible for remote terminal management and cloud-based software licensing which provide data insights. For such services, the revenue recognition occurs as the services are rendered since the performance obligation is satisfied over time. |
| ● | To enable loading and sale of electronic contactless and paper cards. For such transaction fees, the revenue recognition occurs on the transaction date. |
| ● | To provide technical and customer services for products. For such services, the performance obligation is satisfied over time and therefore revenue recognition occurs as the services are rendered. |
The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations. The cost to the Company of this warranty is insignificant.
Contract balances
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Trade receivables, net of allowance for doubtful accounts | $ | 2,291 | $ | 2,430 | ||||
| Customer advances | $ | 109 | $ | 111 | ||||
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
F-20
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 7 –8 - Revenues (cont’d)
Performance obligations(cont’d)
Contract balances
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Trade receivables, net of allowance for doubtful accounts | $ | 2,469 | $ | 4,530 | ||||
| Customer advances | $ | 110 | $ | 141 | ||||
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
Transaction price and variable consideration
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration, revenue is recognized over time as it is mainly is attributed to ongoing services provided. An immaterial amount which is related to the product is not recognized upon delivery since it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands (except per share amounts)
Note 8 –9 - Discontinued operations
As described in Note 1C, the Company divested its interest in the SmartID division and its Medismart activity, and presented these activities as discontinued operations.
Set forth below are the results of the discontinued operations:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2019 | *2018 | 2019 | *2018 | |||||||||||||
| Revenues | $ | - | $ | 374 | $ | - | $ | 1,139 | ||||||||
| Expenses | (36 | ) | (332 | ) | (279 | ) | (924 | ) | ||||||||
| Other income, net | - | - | - | 13 | ||||||||||||
| Net (loss) profit from discontinued operations | (36 | ) | 42 | (279 | ) | 228 | ||||||||||
Three months ended |
Six months ended | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Expenses | (32 | ) | (50 | ) | (43 | ) | (243 | ) | ||||||||
| Net loss from discontinued operations | $ | (32 | ) | $ | (50 | ) | $ | (43 | ) | $ | (243 | ) | ||||
Note 9 –10 - Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, short-term investmentsinterest bearing interest,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. |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands (except per share amounts)
Note 9 – Fair Value of Financial Instruments (cont’d)
By distinguishing between inputs that are observable in the market place, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
F-21
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 10 - Fair Value of Financial Instruments (cont’d)
The Company, in estimating fair value for financial instruments, determined that the carrying amounts of cash and cash equivalents, trade receivables, short-term bank credit and trade payables are equivalent to, or approximate their fair value due to the short-term maturity of these instruments.
The carrying amounts of variable interest rate long-term loans are equivalent or approximate to their fair value as they bear interest at approximate market rates. Regarding the long-term loan that does not bear any interest (see Note 5), taking into account the schedule of its maturities, its amount and the relatively current low market rates, the difference between its carrying amount and its fair value is insignificant.
As of SeptemberJune 30, 2019,2020, the Company held approximately $1,905$1,805 of short-term bank deposits (as of December 31, 2018, $1,078)2019, $2,305). As of SeptemberJune 30, 20192020 and December 31, 2018,2019, short-term depositsdeposit in the amount of $105 and $278, respectively, havehas been pledged as security in respect of guarantees granted in respect of performance guarantees, loans and credit lines received from a bank and cannot be pledged to others or withdrawn without the consent of the bank.
Note 10 –11 - Equity
| A. | Share capital |
On December 23, 2019, the Company entered into a share purchase agreement (hereinafter – the “Agreement”) with Jerry L Ivy, Jr. Descendants Trust (hereinafter - “Ivy”) and two other investors (collectively together with Ivy – “Investors”). The Agreement relates to a private placement of an aggregate of up to 12,500,000 ordinary shares of the Company for aggregate gross proceeds to the Company of up to $2,500.
As part of this Agreement, in December 2019 and January 2020, the Company issued 5,460,000 and 1,040,000 ordinary shares, respectively, for aggregate gross proceed of $1,092 and $208, respectively. The issuance costs were approximately $111 during the second half of 2019. The issuance costs in the three months ended March 31, 2020 were $8. Under the terms of the Agreement and following the issuance of those shares, the Company appointed one representative to its Board of Directors, designated by Ivy. Also, pursuant to the Agreement, Ivy has a right to purchase any future equity securities offered by the Company, except with respect to certain exempt issuances as set forth in the Agreement.
The issuance of the remaining 6,000,000 ordinary shares (hereinafter – the “Subsequent Closing”) for aggregate gross proceeds of $1,200 took place in April 2020, following the approval by the Company’s shareholders on April 14, 2020, of the resolutions detailed below, that were required for the consummation of the Subsequent Closing under the Agreement and the applicable law: (i) an increase in the number of the ordinary shares authorized for issuance from 50,000,000 to 100,000,000; (ii) the issuance of the ordinary shares to Ivy following which Ivy will hold 25% or more of the total voting rights at general meetings of the shareholders of the Company; and (iii) the election of the representative designated by Ivy to the Company’s Board of Directors.
The issuance costs in the three months ended June 30, 2020 were $31.
In addition, pursuant to the terms of the Agreement, on May 5, 2020, after the consummation of the Subsequent Closing, the Company’s Board of Directors appointed an additional representative designated by Ivy. The appointment of such designee shall remain valid through the next general meeting of the Company’s shareholders or as set forth in the Articles of Association of the Company.
F-22
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, except share and per share data
Note 11 - Equity (cont’d)
| B. | Stock option plans |
During each of the nine-monthsix month periods ended SeptemberJune 30, 2020 and June 30, 2019, 814,000 and September 30, 2018, 230,000 and 100,000130,000 options were granted, respectively. The vesting period for the options is three years. The average exercise prices for the options that were granted during the ninesix months ended SeptemberJune 30, 2020 and June 30, 2019 are $0.24 and September 30, 2018, are $0.55 and $1.33,$0.67, respectively. Those options expire up to five years after the date of grant. Any options which are forfeited or cancelled before expiration become available for future grants under the Company’s option plan. The fair value of each option granted to employees during the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 20182019 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
| Nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| Expected volatility | 79 | % | 80 | % | ||||
| Risk-free interest rate | 2.07 | % | 1.92 | % | ||||
| Expected life - in years | 2.44 | 2.33 | ||||||
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands (except per share amounts)
Note 10 – Equity (cont’d)
| Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| Expected volatility | 107 | % | 79 | % | ||||
| Risk-free interest rate | 0.36 | % | 2.41 | % | ||||
| Expected life - in years | 2.49 | 2.44 | ||||||
| 1. | Dividend yield of zero percent for all periods. |
| 2. | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on |
| 3. | Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. |
| 4. | Estimated expected lives are based on historical grants data. |
The Company’s options activity (including options to non-employees) during the nine months ended September 30, 2019 and options outstanding and options exercisable as of December 31, 20182019 and SeptemberJune 30, 2019,2020, are summarized in the following table:
| Number of options outstanding | Weighted average exercise price per share | |||||||
| Outstanding – December 31, 2018 | 1,461,000 | $ | 1.24 | |||||
| Options granted | 230,000 | 0.55 | ||||||
| Options expired or forfeited | (468,669 | ) | 1.68 | |||||
| Outstanding – September 30, 2019 | 1,222,331 | 0.94 | ||||||
| Exercisable as of: | ||||||||
| December 31, 2018 | 855,642 | $ | 1.32 | |||||
| September 30, 2019 | 760,978 | $ | 0.96 | |||||
| Number of options outstanding | Weighted average exercise price per share | |||||||
| Outstanding – December 31, 2019 | 809,000 | $ | 0.93 | |||||
| Options granted | 814,000 | 0.24 | ||||||
| Options expired or forfeited | (30,000 | ) | 0.86 | |||||
| Outstanding – June 30, 2020 | 1,593,000 | 0.58 | ||||||
| Exercisable as of: | ||||||||
| December 31, 2019 | 505,657 | $ | 1.06 | |||||
| June 30, 2020 | 510,657 | $ | 1.04 | |||||
The weighted average fair value of options granted during the ninesix months ended SeptemberJune 30, 20192020 and during the ninesix months ended SeptemberJune 30, 20182019 is $0.2$0.12 and $0.65,$0.24, respectively, per option. The aggregate intrinsic value of outstanding options as of SeptemberJune 30, 20192020 and December 31, 20182019 is approximately zero$228 and $6,zero, respectively. The aggregate intrinsic value of exercisable options as of SeptemberJune 30, 20192020 and December 31, 20182019 is approximately zero and $4, respectively.zero.
F-23
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 10 –11 - Equity (cont’d)
| Stock option plans (cont’d) |
The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of SeptemberJune 30, 2019:2020:
| Options outstanding | Options exercisable | |||||||||||||||||||||||
| Number | Weighted | Number | Weighted | |||||||||||||||||||||
| Outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||
| as of | remaining | Average | As of | remaining | Average | |||||||||||||||||||
| Range of | September 30, | contractual | Exercise | September 30, | contractual | Exercise | ||||||||||||||||||
| exercise price ($) | 2019 | life (years) | Price | 2019 | life (years) | Price | ||||||||||||||||||
| 0.44- 0.90 | 643,000 | 1.78 | $ | 0.69 | 420,000 | 0.31 | $ | 0.74 | ||||||||||||||||
| 1.07-1.68 | 579,331 | 2.2 | $ | 1.21 | 340,978 | 1.75 | $ | 1.24 | ||||||||||||||||
| 1,222,331 | 1.98 | 760,978 | 0.96 | |||||||||||||||||||||
| Options outstanding | Options exercisable | |||||||||||||||||||||||
| Number | Weighted | Number | Weighted | |||||||||||||||||||||
| Outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||
| as of | remaining | Average | As of | remaining | Average | |||||||||||||||||||
| Range of | June 30, | contractual | Exercise | June 30, | contractual | Exercise | ||||||||||||||||||
| exercise price ($) | 2020 | life (years) | Price | 2020 | life (years) | Price | ||||||||||||||||||
| 0.28-0.90 | 1,127,000 | 4.26 | 0.34 | 120,995 | 1.35 | 0.76 | ||||||||||||||||||
| 1.07-1.68 | 466,000 | 1.84 | 1.14 | 389,662 | 1.73 | 1.13 | ||||||||||||||||||
| 1,593,000 | 3.55 | 510,657 | 1.64 | |||||||||||||||||||||
As of SeptemberJune 30, 2019,2020, there was approximately $114$153 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of approximately 1.051.41 years.
During the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, the Company recorded stock-based compensation expenses in the amount of $6$16 and $65,$44, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”Compensation”.
During the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, the Company recorded stock-based compensation expenses in the amount of $96$28 and $180,$90, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”Compensation”.
| C. | Stock options and warrants in the amounts of |
| D. | Shares to non-employees |
There were no grants to non-employees during the six months ended June 30, 2020.
During the ninesix months ended SeptemberJune 30, 2019, and September 30, 2018, the Company issuedgranted 30,000 and 80,000 ordinary shares respectively, to its consultants. The expenses that are recognized due to those grants are immaterial and are presented within ‘stock-based compensation’ in the statement of changes in equity for the ninesix months ended SeptemberJune 30, 2019 and September 30, 2018.2019.
F-24
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 11 –12 - Operating segments
For the purposes of allocating resources and assessing performance in order to improve profitability, the Company’s chief operating decision maker (“CODM”) examines two segments which are the Company’s strategic business units: (1) Retail and Mass Transit Ticketing; and (2) Petroleum.
Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.
| Three months ended September 30,2019 | ||||||||||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Consolidated | Three months ended June 30, 2020 | |||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Revenues | $ | 929 | $ | 2,936 | $ | 3,865 | $ | 4,372 | $ | 481 | $ | 4,853 | ||||||||||||
| Reportable segment gross profit * | 310 | 1,585 | 1,895 | 1,812 | 264 | 2,076 | ||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (190 | ) | (187 | ) | ||||||||||||||||||||
| Stock-based compensation | (1 | ) | (1 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 1,704 | $ | 1,888 | ||||||||||||||||||||
| Three months ended September 30,2018 ** | ||||||||||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Consolidated | Three months ended June 30, 2019 | |||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Revenues | $ | 1,317 | $ | 4,782 | $ | 6,099 | $ | 3,477 | $ | 639 | $ | 4,116 | ||||||||||||
| Reportable segment gross profit * | 682 | 2,750 | 3,432 | 2,123 | 450 | 2,573 | ||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (202 | ) | (198 | ) | ||||||||||||||||||||
| Stock-based compensation | (1 | ) | (1 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 3,229 | $ | 2,374 | ||||||||||||||||||||
F-26F-25
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars,NIS and Euro in thousands, (exceptexcept share and per share amounts)data
Note 11 –12 - Operating segments (cont’d)
| Nine months ended September 30,2019 | ||||||||||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Consolidated | Six months ended June 30, 2020 | |||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Revenues | $ | 2,388 | $ | 8,606 | $ | 10,994 | $ | 8,025 | $ | 1,279 | $ | 9,304 | ||||||||||||
| Reportable segment gross profit * | 1,106 | 5,206 | 6,312 | 3,857 | 587 | 4,444 | ||||||||||||||||||
| Reconciliation of reportable segment gross profit to profit for the period | ||||||||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (588 | ) | (376 | ) | ||||||||||||||||||||
| Stock-based compensation | (3 | ) | (2 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 5,721 | $ | 4,066 | ||||||||||||||||||||
| Nine months ended September 30,2018 ** | ||||||||||||||||||||||||
| Petroleum | Retail and Mass Transit Ticketing | Consolidated | Six months ended June 30, 2019 | |||||||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Total | ||||||||||||||||||||||
| Revenues | $ | 3,942 | $ | 13,408 | $ | 17,350 | $ | 5,670 | $ | 1,459 | $ | 7,129 | ||||||||||||
| Reportable segment gross profit * | 2,000 | 7,628 | 9,628 | 3,621 | 796 | 4,417 | ||||||||||||||||||
| Reconciliation of reportable segment gross profit to profit for the period | ||||||||||||||||||||||||
| Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||||||||||
| Depreciation | (626 | ) | (398 | ) | ||||||||||||||||||||
| Stock-based compensation | (3 | ) | (2 | ) | ||||||||||||||||||||
| Gross profit for the period in the consolidated financial statement | $ | 8,999 | $ | 4,017 | ||||||||||||||||||||
| * | Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation. |
F-27F-26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward - Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, or Quarterly Report, that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “intends,” “plans”, “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any actual future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements may appear in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report and include, among other statements, statements regarding the following:
| ● | any impact of the |
| ● | future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers; |
| ● |
| future costs and expenses and adequacy of capital resources; |
| ● | our expectations regarding our short-term and long-term capital |
| ● | our outlook for the coming months; |
| ● | information with respect to any other plans and strategies for our |
| ● | our expectation to close transactions related to our Retail business with potential customers. |
The factors discussed herein, includingand in those risk factors expressed below and from time to time in our press releases or filings with the Securities and Exchange Commission, or the SEC, could cause actual results and developments to be materially different from those expressed in or implied by such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak and are made only as of the date of this filing.
Our business and operations are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Quarterly Report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described among others under the heading “Risk Factors” below and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
As used in this Quarterly Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track Innovations Ltd. and our subsidiaries, unless otherwise indicated or as otherwise required by the context.
All figures in this Quarterly Report are stated in United States dollars, unless otherwise specified herein.
2
Overview
We are a fintech pioneer and a leading developer of cutting-edge secure cashless payment solutions providing global enterprises with innovative technology for almost three decades. We operate in two main segments: (1) Retail and Mass Transit Ticketing; and (2) Petroleum. As a result of the closing of the MediSmart Transaction in December 2018, we no longer report our “Other” segment.
Our field-proven suite of cashless paymentvision is to strengthen our global presence with innovative solutions is based on an extensiveand provide our customers with the best possible support in superior service and reliable advanced products.
Our intellectual property, or IP, portfolio includingincludes registered patents and patent applications worldwide. Since our incorporation in 1990, we have built an international reputation internationally for reliability and innovation, deploying a large number ofmany solutions for the unattended retail, mass transit, banking, medicalInternet of Payment Things and the petroleum management industries.
We operate a global network of regional offices, distributors and distributorspartners to support various solutions deployed across the globe.
We focus on our core business of providing innovative cashless payment solutions based, among other things, on our innovative contactless NFC technology.
This discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained in “Item 1. Financial Statements” of this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 filed with the SEC.
Results of Operations
Discontinued operations. In December 2018, we completed the sale of our MediSmart activities (most of which is attributed to our former “Other” segment) to Smart Applications International Limited. In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division. The results from such operations and the cash flowsflow for the reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.
In December 2018, we completed the sale of our medical smart card’s operation, or Medismart, (formerly part of the Company’s “Other segment”) to Smart Applications International Limited, or Smart, for a total price of $2.75 million. We have determined that the sale of the Medismart business qualifies as a discontinued operation. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.
All the data in this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those discontinued operations.
Three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 20182019
Sources of Revenue
We have historically derived a substantial majority ofderive our revenues from the sale of our products, including both complete systems and original equipment manufacturer components, licensing and transaction fees and also less significantly, from engineering services, customer services and technical support. In addition, we generate revenues from licensing and transaction fees. During the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
Three months ended September 30, | Three months ended June 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Sales | $ | 2,631 | $ | 4,760 | $ | 3,998 | $ | 2,933 | ||||||||
| Licensing and transaction fees | $ | 1,234 | $ | 1,339 | $ | 855 | $ | 1,183 | ||||||||
| Total revenues | $ | 3,865 | $ | 6,099 | $ | 4,853 | $ | 4,116 | ||||||||
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Sales.Sales decreasedincreased by $2.1 million,$1,065,000, or 45%36%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018.2019. The decreaseincrease is mainly attributed to a decrease in Retail and Mass Transit Ticketing segment sales of our products in Japan and sales of readers in Europe and to a decrease in Petroleum products in the United States, partially offset by an increase in sales in Asia-Pacific region, or APAC, and Europe, partially offset by a decrease in sales of readersPetroleum products in Africa. Such decrease is attributed to certain sales that were planned to occur at the United States.second quarter of 2020 and were postponed to the second half of 2020 as a result of the extended lockdown in South Africa.
Licensing and transaction fees. Licensing and transaction fees include single and periodic payments for distribution rights for our products as well as licensing our IP rights to third parties. Transaction fees are paid by customers based on the volume of transactions processed by systems that contain our products. Our licensing and transaction fees in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, decreased by $105,000,$328,000, or 8%28%. The decrease is mainly attributed to a decrease in Mass Transit Ticketing sales in the Polish market as a result of the impact of the COVID-19 pandemic that is expected to continue for the foreseeable future, partially offset by an increase in our licensing and transaction fees in Europe.Europe and the United States.
We have historically derived revenues from different geographical areas. The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of quarterly revenues in different geographical areas, in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018:2019:
| Three months ended September 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
| 2019 | $ | 492 | 13 | % | $ | 1,714 | 44 | % | $ | 214 | 6 | % | $ | 1,445 | 37 | % | ||||||||||||||||
| 2018 | $ | 618 | 10 | % | $ | 2,517 | 41 | % | $ | 1,548 | 26 | % | $ | 1,416 | 23 | % | ||||||||||||||||
| Three months ended June 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
| 2020 | $ | 237 | 5 | % | $ | 2,144 | 44 | % | $ | 1,662 | 34 | % | $ | 810 | 17 | % | ||||||||||||||||
| 2019 | $ | 500 | 12 | % | $ | 2,272 | 55 | % | $ | 475 | 12 | % | $ | 869 | 21 | % | ||||||||||||||||
Our revenues from sales in Africa decreased by $126,000,$263,000, or 20%53%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, mainly due to a decrease in sales of Petroleum products.products due to certain sales that were planned to occur at the second quarter of 2020 and were postponed to the second half of 2020 as a result of the extended lockdown in South Africa due to the COVID-19 pandemic.
Our revenues from sales in Europe decreased by $803,000,$128,000, or 32%6%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, mainly due to a decrease in Mass Transit sales in the Polish market as a result of salesthe impact of readers and to a lesser extent to a decrease of licensing and transaction fees.COVID-19, partially offset by an increase in Retail sales.
Our revenues from sales in Asia-Pacific region, or APAC decreasedincreased by $1.3$1.2 million, or 86%250%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, mainly due to a decreasean increase in sales of our Uno Plus and GoBox products in Japan.Retail sales.
Our revenues from sales in Americas in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, remained consistent mainly due to an increase in sales of readers in our Retail and Mass Transit Ticketing segment offset by a decrease in Petroleum products.consistent.
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018:2019:
| Three months ended September 30, | Retail and Mass Transit Ticketing | Petroleum | ||||||||||||||
| 2019 | $ | 2,935 | 76 | % | $ | 930 | 24 | % | ||||||||
| 2018 | $ | 4,781 | 78 | % | $ | 1,318 | 22 | % | ||||||||
| Three months ended June 30, | Retail and Mass Transit Ticketing | Petroleum | ||||||||||||||
| 2020 | $ | 4,372 | 90 | % | $ | 481 | 10 | % | ||||||||
| 2019 | $ | 3,477 | 84 | % | $ | 639 | 16 | % | ||||||||
4
Our revenues from Retail and Mass Transit Ticketing in the three months ended SeptemberJune 30, 2019, decreased2020 increased by $1.8 million,$895,000, or 39%26%, compared to the three months ended SeptemberJune 30, 2018,2019, mainly attributed to an increase in Retail sales in the APAC and European markets, partially offset by a decrease in Mass Transit Ticketing sales in Japan andthe Polish market as a decrease in salesresult of readers in Europe, partially offset by an increase in salesthe impact of readers in the United States.COVID-19.
Our revenues from Petroleum in the three months ended SeptemberJune 30, 2019, from Petroleum2020 decreased by $389,000,$158,000, or 30%25%, compared to the three months ended SeptemberJune 30, 2018,2019, mainly due to some sales that were planned to occur at the second quarter of 2020 and were postponed to the second half of 2020 as a decreaseresult of the extended lockdown in sales of Petroleum products inSouth Africa due to the United States.COVID-19 pandemic.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 were as follows (dollar amounts in thousands):
| Three months ended June 30, | ||||||||||||||||
| Cost of revenues | Three months ended September 30, | 2020 | 2019 | |||||||||||||
| 2019 | 2018 | |||||||||||||||
| Cost of sales | $ | 2,161 | $ | 2,870 | $ | 2,965 | $ | 1,742 | ||||||||
| Gross profit | $ | 1,704 | $ | 3,229 | $ | 1,888 | $ | 2,374 | ||||||||
| Gross margin percentage | 44 | % | 53 | % | 39 | % | 58 | % | ||||||||
Cost of salessales.. Cost of sales consists primarily of materials, as well as salaries, fees to subcontractors and related costs of our technical staff that assemble our products. The decreaseincrease of $709,000,$1.2 million, or 25%70%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, resulted primarily from a decreasethe increase in revenues mainly attributed to the increase in Retail sales in APAC and as a result of inventory adjustments.Europe.
Gross margin. The decrease in gross margin in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is mainly attributed to inventory adjustments and to a change in our revenue mix.mix and attributed to the decrease in Mass Transit Ticketing sales in the Polish market as a result of the impact of COVID-19.
5
Operating expenses
Our operating expenses in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 were as follows (in thousands):
| Three months ended June 30, | ||||||||||||||||
| Operating expenses | Three months ended September 30, | 2020 | 2019 | |||||||||||||
| 2019 | 2018 | |||||||||||||||
| Research and development | $ | 840 | $ | 765 | $ | 904 | $ | 817 | ||||||||
| Selling and marketing | $ | 1,193 | $ | 1,591 | $ | 1,193 | $ | 1,320 | ||||||||
| General and administrative | $ | 1,070 | $ | 1,099 | $ | 775 | $ | 1,046 | ||||||||
| Other (gain) expenses, net | $ | (335 | ) | $ | - | |||||||||||
| Total operating expenses | $ | 2,768 | $ | 3,455 | $ | 2,872 | $ | 3,183 | ||||||||
Research and development. Our research and development expenses consist primarily of the salaries and related expenses of our research and development staff, as well as subcontracting expenses. The increase of $75,000,$87,000, or 10%11%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is primarily attributed to an increase in subcontractorsubcontracting expenses.
Selling and marketing. Our selling and marketing expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing subsidiaries and offices in the United States, South Africa and Europe, as well as expenses related to advertising, professional expenses, and participation in exhibitions and tradeshows.tradeshows and a change in allowance for doubtful accounts. The decrease of $399,000,$127,000, or 25%10%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is primarily attributed to a decrease in marketing and advertising expenses, and to a lesser extent to a decrease in employment expenses.expenses and a decrease in exhibition and traveling as a result of the impact of COVID-19.
5
General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive management and financial and administrative staff. These expenses also include costs of our professional advisors (such as legal and accounting), office expenses and insurance. Our general and administrative expensesThe decrease of $271,000, or 26%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is primarily attributed to a capital gain from the sale of a building by our South African subsidiary.
Other (gain) expenses, net. Our other (gain) expenses, net, are primarily attributed to a capital gain from the sale of a building by our South African subsidiary.decrease in employment expenses.
Financing expenses, net
Our financing expenses, net, in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 were as follows (in thousands):
| Three months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Financing expenses, net | $ | (93 | ) | $ | (2 | ) | ||
| Three months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Financing expenses, net | $ | (123 | ) | $ | (37 | ) | ||
Financing expenses consist primarily of interest payable on bank loans, bank commissions and foreign exchange losses. Financing income consists primarily of foreign exchange gains and interest earned on investments in short-term deposits. The decreaseincrease in financing expenses, net, of $86,000, or 232%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018, of $91,000,2019, is mainly attributeddue to an exchange rate differentials.differential.
Net loss from continuing operations
Our net loss from continuing operations in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 was as follows (in thousands):
Three months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net loss from continuing operations | $ | (1,174 | ) | $ | (226 | ) | ||
Three months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net loss from continuing operations | $ | (1,091 | ) | $ | (849 | ) | ||
The decreaseincrease in the net loss from continuing operations of $948,000,$242,000, or 29%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is mainly due to a decreasean increase in our cost of sales and an increase in our financial expenses, net, partially offset by an increase in our sales partially offset byand a decrease in our operating expenses, as described above.expenses.
Net (loss) incomeloss from discontinued operations
Our net (loss) incomeloss from discontinued operations in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 was as follows (in thousands):
Three months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net (loss) income from discontinued operations | $ | (36 | ) | $ | 42 | |||
| Three months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net loss from discontinued operations | $ | (32 | ) | $ | (50 | ) | ||
The resultsOur net losses from thesediscontinued operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The changedecrease in the net loss from discontinued operations of $78,000$18,000, or 36%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is mainly due to income relateda decrease in expenses relating to the MediSmart activity in 2018.legal proceedings.
Net loss
Our net loss in the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 was as follows (in thousands):
Three months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net (loss) income | $ | (1,210 | ) | $ | (184 | ) | ||
| Three months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net loss | $ | (1,123 | ) | $ | (899 | ) | ||
The increase in net loss of $1.0 million$224,000 or 25%, in the three months ended SeptemberJune 30, 2019,2020, compared to the three months ended SeptemberJune 30, 2018,2019, is primarilymainly due to a decreasean increase in our cost of sales and an increase in our financial expenses, net, partially offset by an increase in our sales partially offset byand a decrease in our operating expenses, as described above.expenses.
6
NineSix months ended SeptemberJune 30, 2019,2020 compared to the ninesix months ended SeptemberJune 30, 20182019
Sources of Revenue
During the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
Nine months ended September 30, | Six months ended June 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Sales | $ | 7,286 | $ | 13,353 | $ | 7,394 | $ | 4,655 | ||||||||
| Licensing and transaction fees | $ | 3,708 | $ | 3,997 | $ | 1,910 | $ | 2,474 | ||||||||
| Total revenues | $ | 10,994 | $ | 17,350 | $ | 9,304 | $ | 7,129 | ||||||||
SalesSales. . Sales decreasedincreased by $6.0$2.7 million, or 45%59%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018.2019. The decreaseincrease is mainly attributed to a decreasean increase in Retail sales of readers and Petroleum products in APAC, the United States and to sales in Japan.Europe.
Licensing and transaction feesfees.. Our licensing and transaction fees in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, decreased by $289,000,$564,000, or 7%. The decrease is23%, mainly attributed to a decrease in Mass Transit Ticketing sales in the Polish market as a result of the impact of the COVID-19 pandemic, partially offset by an increase in our licensing and transaction fees in Europe. The decrease in Mass Transit Ticketing sales compared to 2019 is expected to continue for the foreseeable future as a result of the impact of the COVID-19 pandemic.
We have historically derived revenues from different geographical areas. The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of revenues in different geographical areas, in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018:2019:
| Nine months ended September 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
| 2019 | $ | 1,527 | 14 | % | $ | 5,633 | 51 | % | $ | 880 | 8 | % | $ | 2,954 | 27 | % | ||||||||||||||||
| 2018 | $ | 1,859 | 11 | % | $ | 6,313 | 36 | % | $ | 2,794 | 16 | % | $ | 6,384 | 37 | % | ||||||||||||||||
| Six months ended June 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
| 2020 | $ | 754 | 8 | % | $ | 4,110 | 44 | % | $ | 1,875 | 20 | % | $ | 2,565 | 28 | % | ||||||||||||||||
| 2019 | $ | 1,035 | 15 | % | $ | 3,918 | 55 | % | $ | 667 | 9 | % | $ | 1,509 | 21 | % | ||||||||||||||||
Our revenues from sales in Africa decreased by $332,000,$281,000, or 18%27%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, mainly due to a decrease in sales of Petroleum products.products due to some sales that were planned to occur at the second quarter of 2020 and were postponed to the second half of 2020 as a result of the extended lockdown in South Africa due to the COVID-19 pandemic.
Our revenues from sales in Europe decreasedincreased by $680,000,$192,000, or 11%5%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, mainly due to an increase in Retail sales, partially offset by a decrease in our licensing and transaction fees and toMass Transit sales in the Polish market as a lesser extent to a decrease in salesresult of readers.the impact of COVID-19.
Our revenues from sales in APAC decreasedincreased by $1.9$1.2 million, or 69%181%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, mainly due to a decreasean increase in sales in the Japanese market.Retail sales.
Our revenues from sales in Americas decreasedincreased by $3.4$1.1 million, or 54%70%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, mainly due to a decreasean increase in Retail sales of readers to the U.S. market that we believe was derived from new tariffs that were presented by the U.S. administration on goods imported from China to the U.S. market and to a decrease in sales of Petroleum products in Americas. As a result of the above mentioned tariffs, we have relocated our production from China to the Philippines.market.
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
7
The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018:2019:
| Nine months ended September 30, | Retail and Mass Transit Ticketing | Petroleum | |||||||||||||||
| 2019 | $ | 8,605 | 78 | % | $ | 2,389 | 22 | % | |||||||||
| 2018 | $ | 13,407 | 77 | % | $ | 3,943 | 23 | % | |||||||||
| Six months ended June 30, | Retail and Mass Transit Ticketing | Petroleum | ||||||||||||||
| 2020 | $ | 8,025 | 86 | % | $ | 1,279 | 14 | % | ||||||||
| 2019 | $ | 5,670 | 80 | % | $ | 1,459 | 20 | % | ||||||||
Our revenues from Retail and Mass Transit Ticketing in the ninesix months ended SeptemberJune 30, 2019, decreased2020 increased by $4.8$2.4 million, or 36%42%, compared to the ninesix months ended SeptemberJune 30, 2018,2019, mainly attributed to a decreasean increase in Retail sales of readers in APAC, the United States and Europe, partially offset by a decrease in Mass Transit Ticketing sales in Japan.the Polish market as a result of the impact of COVID-19.
Our revenues in the ninesix months ended SeptemberJune 30, 2019,2020 from Petroleum decreased by $1.6 million,$180,000, or 39%12%, compared to the ninesix months ended SeptemberJune 30, 2018,2019, mainly due to some sales that were planned to occur at the second quarter of 2020 and were postponed to the second half of 2020 as a decreaseresult of the extended lockdown in Petroleum products in the United States.South Africa.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 were as follows (in(dollar amounts in thousands):
| Cost of revenues | Nine months ended September 30, | |||||||||||||||
| 2019 | 2018 | Six months ended June 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Cost of sales | $ | 5,273 | $ | 8,351 | $ | 5,238 | $ | 3,112 | ||||||||
| Gross profit | $ | 5,721 | $ | 8,999 | $ | 4,066 | $ | 4,017 | ||||||||
| Gross margin percentage | 52 | % | 52 | % | 44 | % | 56 | % | ||||||||
Cost of sales. The decreaseincrease of $3.1$2.1 million, or 37%68%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, resulted primarily from a decreasean increase in sales.revenues mainly attributed to the increase in Retail sales in APAC, the United States and Europe.
Gross margin.Our The decrease in gross margin percentage in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018, remained consistent.2019, is mainly attributed to a change in our revenue mix and attributed to the decrease in Mass Transit Ticketing sales in the Polish market as a result of the impact of COVID-19.
9
Operating expenses
Our operating expenses in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 were as follows (in thousands):
| Six months ended June 30, | ||||||||||||||||
| Operating expenses | Nine months ended September 30, | 2020 | 2019 | |||||||||||||
| 2019 | 2018 | |||||||||||||||
| Research and development | $ | 2,528 | $ | 2,391 | $ | 1,802 | $ | 1,688 | ||||||||
| Selling and marketing | $ | 3,798 | $ | 4,700 | $ | 2,355 | $ | 2,605 | ||||||||
| General and administrative | $ | 3,081 | $ | 3,001 | $ | 1,732 | $ | 2,011 | ||||||||
| Other (gain) expenses, net | $ | (335 | ) | $ | 70 | |||||||||||
| Total operating expenses | $ | 9,072 | $ | 10,162 | $ | 5,889 | $ | 6,304 | ||||||||
Research and development. The increase of $137,000,$114,000, or 6%7%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, is primarily attributed to an increase in subcontractorsubcontracting expenses.
Selling and marketing. The decrease of $250,000, or 10%, in the six months ended June 30, 2020, compared to the six months ended June 30, 2019, is primarily attributed to a decrease in marketing and advertising expenses, partially offset bya decrease in employment expenses and a decrease in exhibition and traveling as a result of the impact of COVID-19.
8
General and administrative. The decrease of $279,000, or 14%, in the six months ended June 30, 2020, compared to the six months ended June 30, 2019, is primarily attributed to a decrease in employment expenses.
Selling and marketing. The decrease of $902,000, or 19%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is primarily attributed to a decrease in employment expenses and to a lesser extent to a decrease in marketing and advertising expenses.
General and administrative. Our general and administrative expenses in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, remained consistent.
Other (gain) expenses, net. The change of $405,000 in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, is mainly due to a capital gain from the sale of a building by our South African subsidiary.
Financing expenses,income (expenses), net
Our financing expenses,income (expenses), net, in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 were as follows (in thousands):
| Nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Financing expenses, net | $ | (199 | ) | $ | (129 | ) | ||
| Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Financing income (expenses), net | $ | 45 | $ | (106 | ) | |||
The increase ofchange in financing expenses,income (expenses), net, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, of $70,000, or 54%,$151,000, is mainly attributeddue to an exchange rate differentials, partially offset by a decrease in interest expenses of our short-term and long-term bank loans.differential.
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Net loss from continuing operations
Our net loss from continuing operations in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 was as follows (in thousands):
Nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net loss from continuing operations | $ | (3,575 | ) | $ | (1,025 | ) | ||
| Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net loss from continuing operations | $ | (1,749 | ) | $ | (2,401 | ) | ||
The increasedecrease in net loss from continuing operations of $2.6 million,$652,000, or 249%27%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, is mainly due to a decreasean increase in our sales, partially offset by a decrease in our operating expenses and a change in our financing income (expenses), net, partially offset by an increase in cost of sales, as described above.
Net (loss) incomeloss from discontinued operations
Our net (loss) incomeloss from discontinued operations in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 was as follows (in thousands):
Nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net (loss) income from discontinued operations | $ | (279 | ) | $ | 228 | |||
| Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net loss from discontinued operations | $ | (43 | ) | $ | (243 | ) | ||
The resultsOur net losses from thesediscontinued operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The changedecrease in the net loss from discontinued operations results of $507,000$200,000, or 82%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 20182019, is mainly attributeddue to the MediSmart activitya decrease in 2018 and in a lesser amount expenses relatedrelating to SmartID divestiture in 2019.legal proceedings.
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Net incomeloss
Our net incomeloss in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019 was as follows (in thousands):
| Nine months ended September 30, | |||||||
| 2019 | 2018 | ||||||
| Net (loss) income | $ | (3,854) | $ | (797) | |||
| Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net loss | $ | (1,792 | ) | $ | (2,644 | ) | ||
The increasedecrease in net loss of $3.1 million,$852,000, or 32%, in the ninesix months ended SeptemberJune 30, 2019,2020, compared to the ninesix months ended SeptemberJune 30, 2018,2019, is primarily due to an increase in our sales, a decrease in our salesoperating expenses, a change in our financing income (expenses), net, and an increasea decrease in net loss from discontinued operations, partially offset by a decreasean increase in our operating expenses,cost of sales, as described above.
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Liquidity and Capital Resources
Our principal sources of liquidity since our inception have been sales of our products and services,revenues, proceeds from sales of equity securities, borrowings from banks and government, cash from the exercise of options and warrants and proceeds from the divestiture of partspart of our businesses. WeAs of June 30, 2020, we had cash, cash equivalents and short-term investments representing bank deposits of $5.3$5.2 million as of September 30, 2019 (of which an amount of $105,000 has been pledged as security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank), and $5.9 million as of December 31, 2018 (of which an amount of $278,000 had then been pledged as security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank)for certain items). We believe that we have sufficient capital resources to fund our operations infor at least the next 12 months. We are looking
On December 23, 2019, we entered into a share purchase agreement, or the Agreement, with Jerry L Ivy, Jr. Descendants Trust, or Ivy, and two other investors, or collectively together with Ivy, the Investors. The Agreement relates to a private placement of an aggregate of up to 12,500,000 of our ordinary shares for additional resourcesaggregate gross proceeds to us of capital, including investmentup to $2,500,000.
As part of this Agreement, in December 2019 and January 2020, we issued 5,460,000 and 1,040,000 ordinary shares, respectively, for aggregate gross proceed of $1,092,000 and $208,000 respectively. Under the term of the Agreement and following the issuance of those shares, we appointed one representative to our Board of Directors, designated by Ivy. Also, pursuant to the Agreement, Ivy has a right to purchase any future equity securities and loans,offered by us, except with respect to certain exempt issuances as set forth in the Agreement.
The issuance of the remaining 6,000,000 ordinary shares, or the Subsequent Closing, for aggregate gross proceeds of $1,200,000 took place in April 2020, following the approval by our shareholders on April 14, 2020. Following the Subsequent Closing Ivy designated an additional candidate that our Board appointed as a director. Also, we undertook that following the Subsequent Closing, we will file a registration statement with the SEC to register re-sales of the ordinary shares issued under the Agreement. We plan to file such registration statement in the near future. We may need to raise additional funds in order to finance our operations. As of September 30, 2019,growth and to satisfy our long-term bank loans are denominated in South African Rand ($26,000, with maturity dates ranging from 2019 through 2023).working capital needs.
In March 2019, OTI Petrosmart (Pty), Ltd.,connection with the outbreak of the COVID-19 pandemic, we have taken steps to protect our South African subsidiary, or Petrosmart, entered into an agreement pursuant to which Petrosmart agreed to sell its head officeworkforce in Cape Town,Israel, the United States, Poland, South Africa and elsewhere. Such steps include work from home where possible, minimizing face-to-face meetings and utilizing video conference as much as possible, social distancing at facilities and elimination of all international travel. We continue to comply with all local health directives.
So far, the most significant direct impact of the COVID-19 pandemic has been a third party for a consideration of Rand 15,500,000 (approximately $1.1 million), and Petrosmart agreed to lease backdecrease in our revenues derived from Mass Transit Ticketing sales in the Polish market. The revenues from this building for its current operations. The sale was completed, and the operating lease commencedoperation, that were relatively stable during the thirdyear preceding the COVID-19 outbreak, decreased by approximately $1 million in the first half of 2020, compared to the first half of 2019, mainly due to the lockdown and other restrictions and consequences of the COVID-19 as started in March 2020. This impact is expected to continue for the foreseeable future. As a response to this effect, we have taken steps to reduce some costs that are not essential under the current circumstances.
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Another impact of COVID-19 has been on product delivery, where components’ procurement lead time is longer and a shortage in components has grown as the duration of the COVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortage in components may continue or get worse. Therefore, we maintain a comprehensive network of world-wide suppliers.
Due to the extended lockdown in South Africa, some of the sales that were planned to occur at the second quarter of 2020 were postponed to the second half of 2020 and therefore caused a decrease in the revenues derived from the Petroleum segment compared to the second quarter of 2019.
Our composition of long-term loans as of September 30, 2019, was as follows (in thousands):
| September 30, 2019 | ||||
| Long-term loans | $ | 34 | ||
| Less - current maturities | 8 | |||
| $ | 26 | |||
Our and certain ofAs for our subsidiaries’ manufacturing facilities and certain equipmentRetail activity, we have been pledged as security in respect ofseen a loan receivedhigher interest from a bank. Asgrowing number of September 30, 2019,potential customers and partners as they forecasted that the need for our short-term deposits inproducts will grow, yet execution of closings is still slow due to the amount of $105,000 have been pledged as security in respect of guarantees granted to third parties, loans and credit lines received from a bank. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.current business environment.
As of September 30, 2019, we granted guaranteesIt is difficult to third parties including performance guarantees and guarantees to secure customer advances inpredict what other impacts the sum of $387,000. The expiration dates of the guarantees range from April 2020 to September 2021.
Operating activities related to continuing operations
For the nine months ended September 30, 2019, net cash used in continuing operating activities was $1.9 million, primarily due to a $879,000 increase in inventory, a $585,000 decrease in other current liabilities, a $328,000 gainCOVID-19 pandemic may have on sale of property and equipment, a $48,000 decrease in accrued interest and a $25,000 decrease in deferred tax liability, partially offset by a $1.6 million decrease in trade receivables, a $951,000 of depreciation expenses, a $506,000 increase in trade payables, a $395,000 decrease in other receivables and prepaid expenses, a $96,000 expense due to stock-based compensation issued to employees and a $66,000 change in accrued severance pay, net.
For the nine months ended September 30, 2018, net cash provided by continuing operating activities was $56,000, primarily due to a $1.4 million decrease in trade receivables, $978,000 of depreciation expenses and a $180,000 expense due to stock-based compensation issued to employees, partially offset by a $381,000 increase in inventory, a $360,000 decrease in deferred tax liability, a $263,000 decrease in trade payables, a $255,000 increase in other receivables and prepaid expenses, a $151,000 decrease in other current liabilities, a $25,000 gain on sale of property and equipment and a $19,000 change in accrued severance pay, net.
Operating activities related to discontinued operations
For the nine months ended September 30, 2019, net cash used in discontinued operating activities was $1.4 million, mainly related to the dispute regarding Merwell Inc. related to the SmartID division.
For the nine months ended September 30, 2018, net cash provided by discontinued operating activities was $836,000, related to the SmartID division and previous parking business.
Investing and financing activities related to continuing operations
For the nine months ended September 30, 2019, net cash used in continuing investing activities was $455,000, mainly due to $978,000 in proceeds of short-term investments, $433,000 of purchases of property and equipment and $156,000 investment in capitalized product costs, partially offset by $1.1 million in proceeds from the sale of property and equipment and $10,000 in proceeds from restricted deposits for employee benefits.
For the nine months ended September 30, 2018, net cash provided by continuing investing activities was $696,000, mainly due to $1.2 million of short-term investments, $52,000 in proceeds from the sale of property and equipment and $8,000 in proceeds from restricted deposits for employee benefits, partially offset by $467,000 purchases of property and equipment and $92,000 investment in capitalized product costs.
For the nine months ended September 30, 2019, net cash provided by continuing financing activities was $2.4 million, mainly due to a $2.6 million increase in short-term bank credit, partially offset by a repayment of $261,000 of long-term bank loans.
For the nine months ended September 30, 2018, net cash used in continuing financing activities was $4.4 million, mainly due to a $3.4 million decrease in short-term bank credit and a repayment of $979,000 of long-term bank loans, partially offset by proceeds of $34,000 from the exercise of options.us.
In addition, on May 24, 2019,11, 2020, based on Polish government regulations introduced in relation to the COVID-19 pandemic, ASEC S.A. (Spolka Akcyjna), or, the Subsidiary, a wholly-owned Polish subsidiary of the Company, entered into a loan agreement, or the Agreement, withSubsidiary, received the consent of PKO Bank Polski, a Polish bank, or the Lender. The Agreement provides thatLender, to postpone the Lender will grant an overdraft facilitymaturity date of a secured loan, provided to the Subsidiary in May 2019 and reported then, in the amount of $2,000,000, or the Loan Commitment. On May 24, 2019, or, the Lender loanedby six months, to the Subsidiary the full amountNovember 22, 2020 instead of the Loan Commitment, secured by certain assets of the Subsidiary, or the Secured Loan. The Secured Loan matures on May 23, 2020.2020, as the loan agreement provided. The Secured Loanloan will be payable in full on maturity (with the option of early repayment fromby the Subsidiary side)Subsidiary) and the interest will beof 1-month LIBOR plus 1.8% is paid on a monthly basis. The Secured Loan bears interest at an annual interest rate based on 1-month LIBOR plus a margin of 1.8%, or currently approximately 3.8% in total. The Agreementloan agreement includes customary events of default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the Agreement,loan agreement, etc. If an event of default occurs, the Lender may reduce the amount of the Secured Loan,loan, demand an additional security or terminate the Agreement.agreement. The Subsidiary repaid approximately $156,000 of this loan during the first half of 2020.
As part of an additional Polish government assistance, the Subsidiary received a long-term loan in an amount of approximately $800,000 through another Polish bank in June 2020. Depending on some scenarios, such as average number of employees and financial results, a portion of the loan may be forgiven. The loan will be repaid in 24 monthly equal installments starting in July 2021. This loan is denominated in Polish Zloty and does not bear interest. In the event of breach by the Subsidiary of any of the obligations, as described in the loan agreement, the bank may terminate such agreement. In such a case, the long-term loan shall become due and payable within 14 business days from receipt of the termination notice.
Our manufacturing facilities and certain equipment have been pledged as security in respect of a loan received from a bank. Our short-term deposits in the amount of $105,000 have been pledged as security in respect of credit lines received from a bank. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.
As of June 30, 2020, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in the sum of $495,000. The expiration dates of the guarantees range from January 2021 to September 2021.
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Operating activities related to continuing operations
For the six months ended June 30, 2020, net cash used in continuing operating activities was $807,000 primarily due to a $1.7 million net loss from continuing operations, a $245,000 decrease in other current liabilities, $162,000 of accrued interest and linkage differences and $58,000 of deferred tax benefits, net, partially offset by $604,000 of depreciation and amortization, a $379,000 decrease in other receivables and prepaid expenses, a $174,000 decrease in inventories, a $110,000 increase in trade payables, a $101,000 decrease in trade receivables, net, $28,000 of expenses due to stock based compensation issued to employees and others and a $11,000 increase in accrued severance pay, net.
For the six months ended June 30, 2019, net cash used in continuing operating activities was $1.2 million primarily due to a $2.4 million net loss from continuing operations, a $1.4 million increase in inventories, a $540,000 decrease in other current liabilities, $24,000 of deferred tax benefits, net, $18,000 of accrued interest and linkage differences, net, and a $2,000 gain on sale of fixed assets, partially offset by a $1.3 million decrease in trade receivables, net, $643,000 of depreciation and amortization, a $597,000 decrease in other receivables and prepaid expenses, a $585,000 increase in trade payables, $90,000 of expenses due to stock based compensation issued to employees and others, and a $44,000 increase in accrued severance pay, net.
Operating activities related to discontinued operations
For the six months ended June 30, 2020, net cash used in discontinued operating activities was $526,000, mainly related to reduction in the amount we were entitled to receive in connection with our lawsuit against Harel Insurance Company Ltd.
For the six months ended June 30, 2019, net cash used in discontinued operating activities was $1.3 million, mainly related to the dispute regarding Merwell Inc. in connection with the SmartID division.
Investing and financing activities related to continuing operations
For the six months ended June 30, 2020, net cash provided by continuing investing activities was $21,000, mainly due to a $511,000 change in short-term investments, net, partially offset by $490,000 of purchases of property and equipment and intangible assets.
For the six months ended June 30, 2019, net cash used in continuing investing activities was $1.5 million, mainly due to a $1.2 million change in short-term investments, net, and $341,000 of purchases of property and equipment and intangible assets, partially offset by $10,000 in proceeds from the sale of fixed assets and $10,000 in proceeds from restricted deposits for employee benefits.
For the six months ended June 30, 2020, net cash provided by continuing financing activities was $2.2 million, mainly due to $1.4 million in proceeds from issuance of shares, net of issuance costs, $799,000 in proceeds from long-term bank loans and a $62,000 increase in short-term bank credit and loans, net, partially offset by $7,000 of repayments of long-term bank loans.
For the six months ended June 30, 2019, net cash provided by continuing financing activities was $2.5 million, mainly due to a $2.7 million increase in short-term bank credit and loans, net, partially offset by $233,000 of repayments of long-term bank loans.
Investing and financing activities related to discontinued operations
We had no cash flows provided by or used in discontinued investing or financing activities in the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018.2019.
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Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures -Our management, including our Interim Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was made known to our management, including our CEO and CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of SeptemberJune 30, 2019.2020. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective as of such date.
Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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In December 2013,On September 2, 2012, we completedfiled an insurance lawsuit in the saleIsraeli Central District Court against Harel Insurance Company Ltd., or Harel, for damages incurred by us due to flooding in our subcontractor’s (Smartrac) manufacturing site in Thailand in 2011, in the amount of certain assets, subsidiaries and intellectual property, or IP, relatingapproximately $11 million. This caused disruptions to our Smart ID division,supply chain and specifically affected our ability to deliver products to our customers. On August 23, 2017, the District Court in Israel issued judgment in our favor in the amount of approximately $2.3 million (including $0.7 million specifically set for a total purchase price of $10,000,000legal fees, etc.) for insurance coverage for damages incurred in cash and an additional $12,500,000 subject to performance-based milestones. On April 20, 2016, the purchaserconnection with flooding in Thailand. Harel submitted its appeal of the Smart ID division, SuperCom Ltd., or SuperCom, and we entered intojudgment to the Israeli Supreme Court as well as a request for stay of judgment. On October 30, 2017, the Court denied the requested stay. Following the denial of Harel’s request, a payment of approximately $1.6 million was received. On January 26, 2020, a hearing in the Israeli Supreme Court took place in front of three judges. Further to discussions held during the hearing, the judges made the parties an offer by way of a settlement, agreement resolving certain litigation between SuperCom and us pursuant to which SuperCom paid us $2,050,000the Company shall return to Harel a sum of approximately $553,000, in three subsequent monthly installments commencing on February 26, 2020. Based on the Supreme Court’s recommendation and will agree to pay us up to $1,500,000 with and subject to a certain earn-out mechanism. In November 2017, we commenced an arbitration procedure with SuperCom, in which we claim that additional earn-out payments have not been paid to us. SuperCom has also raised claims against us during the arbitration procedure. An arbitration decision was issued on December 24, 2018 in our favor and denied SuperCom’s claims. The Arbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that we are entitled to receive, and to pay us accordingly, or otherwise pay us the maximum earn-out amount, which equals $1,500,000, minus the earn-out amounts that were already paid by SuperCom to us. Asadvice of the date hereof, the said arbitration verdict has been validated as a court verdict, andCompany’s legal counsel, the Company is currently taking actionsagreed to enforce it.the suggested offer which was also approved by Harel. We have paid all the settlement amount.
In June 2013, prior to our divestiture of our SmartID division, Merwell Inc., or Merwell, filed a claim against us before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division were later assigned to and assumed by SuperCom Ltd., or SuperCom, in its purchase of the division. SuperCom undertook to indemnify us and hold us harmless against any liabilities we may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell $854,912 for outstanding commissions, plus expenses and orderinglegal fees, as well as a right to receive additional information from the Company regarding an additional engagement period in Tanzania and a right to provide further financial detailspossibly receive additional amounts from the Company, if at all, according to the information that might result in additional payments to Merwell.will be provided. The arbitration decision had been appealed by SuperCom (on behalf of the Company) but the appeal was denied. In order to collect the award, Merwell filed a motion against the Company and on January 7, 2019 the Nazareth District Court issued a judgment requiring the Company to pay Merwell an amount of NIS 5,078,5815,080,000 (approximately $1,370,000). On January 8, 2019, we paid Merwell such amount. As mentioned above, basedBased on the Company’s prior agreement with SuperCom (which was granted an effect of a court judgment), we deem SuperCom to be liable for all the costs and liabilities arising out of this claim. OnSince SuperCom failed to pay us the amounts due, in February 17, 2019, we initiated an arbitration process or the Arbitration, to collect from SuperCom the amount paid to Merwell, which SuperCom failed to pay, and to assure that SuperCom will payas well as any additionalcomplementary amounts if requiredas may be ordered in the future. On March 26, 2019, SuperCom filed a petition to the Tel-Aviv District Court, asking to order that the dispute will be conducted in Court and not in arbitration. On October 29, 2019, a hearing was conducted in court regarding SuperCom’s petition, and at the end of the hearing, following the court’s recommendation, SuperCom agreed to withdraw its petition. As a result, the court gave a verdict ordering that the Arbitration will continue. On the same day, the Company approached the arbitrator, asking to renew the Arbitration, and on October 30, 2019 the arbitrator scheduled a preliminary hearing.
On June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration, with respect to the additional financial details that Merwell claims that the Company was ordered to provide according to the arbitration verdict from February 21, 2016, and additional payments that Merwell claims that the Company is obligated to pay Merwell. The said financial details refer to the quantity of smart driving licenses that Merwell claims were issued in the later period of a project in Tanzania in which Merwell claims to have provided services to the Company. Merwell claims that despite the Company’s failure to provide the details, Merwell obtained the details independently from other sources, and they indicate that the Company is obligated to pay Merwell an additional amount of $1,618,792. The Company rejects the details that were presented by Merwell$1,618,792, and their validity, and also raised preliminary claims that this matter cannotthere might be determined in arbitration, but only in court, since the relevant data is held by SuperCom, who is not a partyadditional amounts to the arbitration agreement with Merwell, but issued the licensesbe claimed in the relevant period and therefore isfuture, as additional information might be found from time to time. On March 4, 2020, we submitted a necessary party to the dispute. The Company filed an application to the arbitrator, and on August 8, 2019, the arbitrator determined that the Company’s procedural claims should be heard and determined in court. Following that decision, on September 8, 2019, the Company filed a petition to the Tel-Aviv District Court, asking it to order that Merwell’s claims in the complementary procedure will be heard in court and not in arbitration. On October 22, 2019, Merwell submitted its response to this complementary claim, rejecting Merwell’s claims. As mentioned above, we are conducting in parallel a separate arbitration process against SuperCom in that matter, as we deem SuperCom to be liable for all the court. As of the datecosts and liabilities arising out of this report, a hearing in the petition has not yet scheduled.claim.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.1A. Risk Factors.
In February 2019,Our business faces many risks, a number of which are described under the Company issued to MZHCI LLC 30,000 Ordinary Shares of the Company for fully performed services provided to the Company. We issued these shares pursuant to an exemption from registration containedcaption “Risk Factors” in Section 4(a)(2) of the Securities Act of 1933, as amended.
As reported on the Company’s Currentour Annual Report on Form 8-K filed on September 30, 2019,10-K for the proposal to amendfiscal year ended December 31, 2019. Other than as set forth below, there have been no material changes from the Amendedrisk factors previously disclosed in such Annual Report. The risks described in such Annual Report and Restated Compensation Policybelow may not be the only risks we face. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the Company,events or circumstances described in the Compensation Policy, was not approvedrisk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 or described below occurs, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and below, and the information contained under the caption “Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.
We face risks resulting from the recent outbreak of the COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.
Our operations and business could be materially adversely affected by the general meetingrecent outbreak of shareholdersCOVID-19. Our revenues from Mass Transit Ticketing sales in the Polish market decreased during the first half of 2020 and are expected to continue to decrease in the foreseeable future compared to 2019. In addition, the execution of transactions related to our Retail activity is slow due to COVID-19 and there is no assurance that we will close any of the Company, or the General Meeting,potential transactions with customers and partners. Further, another impact of COVID-19 is on product delivery, where components’ procurement lead time is longer and a shortage in components has grown as the proposal did not receiveduration of the requisite majority required underCOVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortages in component may continue or get worse. Although, we maintain a comprehensive network of world-wide suppliers to handle such delays in delivery, we may still suffer delays. Simultaneously, we are attempting to comply with rapidly changing restrictions, such as travel restrictions, curfews and others. In particular, following recommendations from the Israeli Companies Law, orMinistry of Health and the Companies Law. NotwithstandingMinistry of Finance, on March 16, 2020, the above,Israeli prime minister announced restrictions under the Companies Law, the board of directors of a company has the right to overrule the resolution of the general meeting of the company’s shareholders to not approve proposed changes to the company’s compensation policy, if certain conditions are being met. Accordingly, and pursuant to the Companies Law, on November 5, 2019, the Company’s board of directors, or the Board, approved the same proposed amendments to the Compensation Policy, as were includedwhich businesses in the Company’s Definitive Proxy Statement filedprivate sector must reduce their onsite workforce. Currently travel to and from work is still permitted; however, the authorities may place additional, more restrictive measures on August 23, 2019. Priorbusinesses and individuals. Though we may still operate under such regulations, any additional actions taken by the Israeli government could further limit that ability, which may have a material adverse effect on our operations and financial results. A significant reduction in our workforce and our compliance with instructions imposed by Israeli authorities may harm our ability to such approval,continue operating our business and materially and adversely affect our operations and financial condition. Further, we cannot assure you that we will be designated an “essential business”, as defined under regulatory instructions, and moreover, we cannot foresee whether the Compensation Committee ofIsraeli authorities will impose further restrictive instructions, which if implemented may lead to significant changes.
Authorities around the Companyworld have and thereaftermay continue implementing similar restrictions on business and individuals in their jurisdictions. We are still assessing our business operations and system supports and the Board, discussed the suggested amendmentsimpact COVID-19 may have on our results and financial condition. To date, we have taken action to the Compensation Policy, and determined that notwithstanding the outcome of the General Meeting, the approval of the amendments to the Compensation Policy isreduce our operating expenses in the Company’s best interest.short term, but there can be no assurance that this analysis or remedial measures will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences.
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| * | Filed herewith. |
| ** | Furnished herewith. |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ON TRACK INNOVATIONS LTD. | ||||
| By: | /s/ Yehuda Holtzman | |||
| Yehuda Holtzman, | ||||
| Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| Dated: August 12, 2020 | ||||
| By: | /s/ Assaf Cohen | |||
| Assaf Cohen, | ||||
| Chief Financial Officer | ||||
| ( Principal Financial and Accounting Officer) | ||||
| Dated: | ||||
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