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 March 31, 20212022

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from

__________ to __________

 

Commission file number 000-49877

 

ON TRACK INNOVATIONS LTD.
(Exact name of registrant as specified in its charter)

 

Israel N/A
(State or other jurisdiction of

incorporation or organization)
 (IRS Employer

Identification No.)

Hatnufa 5, Yokneam Industrial Zone

Box 372, Yokneam, Israel

 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 filerAccelerated filer

Non-accelerated filer

Smaller reporting company
Emerging growth company     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐    No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 53,824,37775,775,393 Ordinary Shares outstanding as of May 10, 2021.11, 2022.

 

 

 

 

 

 

ON TRACK INNOVATIONS LTD.

 

TABLE OF CONTENTS

 

Part I - Financial Information
Item 1.Financial Statements1
   
Item 1.Financial Statements1
 
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2
   
Item 4.Controls and Procedures9
Part II - Other Information
Item 1.Legal Proceedings10
   
Item 2.Part II - Other InformationUnregistered Sales of Equity Securities and Use of Proceeds1011
   
Item 1.Legal Proceedings11
 
Item 6.Exhibits1011
   
 Signatures1112

 

i

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES

 

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 20212022

(Unaudited)

 


(Unaudited)

1

On Track Innovations Ltd.

and its Subsidiaries

Interim Condensed Consolidated Financial Statements

As of March 31, 2022

(Unaudited)

 

On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Financial Statements as of March 31, 2022

Contents

Interim Unaudited Condensed Consolidated Financial Statements as of March 31, 2021

Contents

Page
Interim Unaudited Condensed Consolidated Balance SheetsF-2 - F-3
Interim Unaudited Condensed Consolidated Statements of OperationsF-4
Interim Unaudited Condensed Consolidated Statements of Comprehensive LossF-5
Interim Unaudited Condensed Consolidated Statements of Changes in EquityF-6
Interim Unaudited Condensed Consolidated Statements of Cash FlowsF-7 - F-8

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

F-9 - F-29

F-1

 


On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Balance Sheets

US dollars in thousands except share data

  March 31  December 31 
  2021  2020 
Assets        
         
Current assets        
Cash and cash equivalents $979  $1,377 
Short-term investments  105   105 
Trade receivables (net of allowance for doubtful accounts of $608 and $620 as of March 31, 2021 and December 31, 2020, respectively)  1,759   1,148 
Other receivables and prepaid expenses  645   695 
Inventories  2,369   2,479 
Assets from discontinued operations - held for sale  6,559   6,358 
Total current assets  12,416   12,162 
         
Non-current assets        
Long term restricted deposit for employee benefits  493   511��
Severance pay deposits  396   411 
Property, plant and equipment, net  715   752 
Intangible assets, net  229   247 
Right-of-use assets due to operating leases  2,723   2,903 
Total non-current assets  4,556   4,824 
         
Total Assets $16,972  $16,986 

  March 31  December 31 
  2022  2021 
Assets      
       
Current assets        
Cash and cash equivalents $1,750  $815 
Trade receivables (net of allowance for doubtful accounts of $613 and $614 as of March 31, 2022 and December 31, 2021, respectively)  1,956   3,274 
Other receivables and prepaid expenses  1,561   1,159 
Inventories  3,394   3,200 
         
Total current assets  8,661   8,448 
         
Non-current assets        
         
Restricted bank deposit  -   105 
         
Long term restricted deposit for employee benefits  518   529 
         
Severance pay deposits  475   485 
         
Property, plant and equipment, net  637   673 
         
Intangible assets, net  166   162 
         
Right-of-use assets due to operating leases  1,965   2,134 
Total non-current assets  3,761   4,088 
Total Assets $12,422  $12,536 

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 data

  March 31  December 31 
  2021  2020 
Liabilities and Equity        
         
Current Liabilities        
Short-term bank credit and current maturities of long-term bank loans $1,109  $542 
Convertible short-term loan from a controlling shareholder  8   625 
Trade payables  1,507   1,667 
Other current liabilities  2,347   2,283 
Liabilities from discontinued operations - held for sale  5,959   5,829 
Total current liabilities  10,930   10,946 
         
Long-Term Liabilities        
Long-term loans, net of current maturities  8   14 
Long-term liabilities due to operating leases, net of current maturities  2,097   2,343 
Accrued severance pay  949   977 
Total long-term liabilities  3,054   3,334 
Total Liabilities  13,984   14,280 
         
Commitments and Contingencies, see note 6        
         
Equity        
Ordinary shares of NIS 0.1 par value: Authorized – 100,000,000 shares as of March 31, 2021 and December 31, 2020; issued: 55,003,076 shares as of March 31, 2021 and December 31, 2020; outstanding: 53,824,377 shares as of March 31, 2021 and December 31, 2020  1,423   1,423 
Additional paid-in capital  230,789   227,209 
Treasury shares at cost - 1,178,699 shares as of March 31, 2021 and December 31, 2020  (2,000)  (2,000)
Accumulated other comprehensive loss  (1,098)  (961)
Accumulated deficit  (226,126)  (222,965)
Total Equity  2,988   2,706 
         
Total Liabilities and Equity $16,972  $16,986 
  March 31  December 31 
  2022  2021 
Liabilities and Equity        
         
Current Liabilities        
Short-term bank credit and current maturities of long-term bank loans $2,001  $2,095 
Convertible short-term loan from shareholders, including a controlling shareholder  -   1,745 
Convertible loan from Nayax Ltd. (“Nayax”)  5,595   - 
Trade payables  2,212   4,657 
Other current liabilities  2,464   2,832 
         
Total current liabilities  12,272   11,329 
         
Long-Term Liabilities        
Long-term loans, net of current maturities  17   21 
Long-term liabilities due to operating leases, net of current maturities  1,514   1,650 
Accrued severance pay  1,044   1,038 
Total long-term liabilities  2,575   2,709 
         
Total Liabilities  14,847   14,038 
         
Commitments and Contingencies, see note 6        
         
Equity        
        
Ordinary shares of NIS 0.1 par value: Authorized – 120,000,000 shares as of March 31, 2022 and December 31, 2021; issued: 76,954,092 shares as of March 31, 2022 and December 31, 2021; outstanding: 72,789,893 shares as of March 31, 2022 and December 31, 2021  2,008   2,008 
Additional paid-in capital  233,498   233,462 
Treasury shares at cost - 1,178,699 shares as of March 31, 2022 and December 31, 2021  (2,000)  (2,000)
Accumulated other comprehensive loss  (347)  (348)
Accumulated deficit  (235,584)  (234,624)
Total Equity  (2,425)  (1,502)
         
Total Liabilities and Equity $12,422  $12,536 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

F-3

 


On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Statements of Operations

US dollars in thousands except share and per share data

  Three months ended
March 31
 
  

2021

  

(*) 2020

 
Revenues      
Sales $2,387  $3,343 
Software as a Service (“SaaS”)  382   324 
Total revenues  2,769   3,667 
         
Cost of revenues        
Cost of sales  1,366   2,021 
Total cost of revenues  1,366   2,021 
         
Gross profit  1,403   1,646 
         
Operating expenses        
Research and development  838   893 
Selling and marketing  605   698 
General and administrative  746   802 
Total operating expenses  2,189   2,393 
         
Operating loss from continuing operations  (786)  (747)
         
Loss from change in fair value of embedded derivative  (1,974)  - 
Other financial income, net  4   176 
Financial (expenses) income, net  (1,970)  176 
         
Loss from continuing operations before taxes on income  (2,756)  (571)
         
Income tax benefits (expenses), net  13   (5)
         
Loss from continuing operations  (2,743)  (576)
Loss from discontinued operations  (418)  (93)
         
Net loss $(3,161) $(669)
         
Basic and diluted net loss attributable to shareholders per ordinary share        
From continuing operations $(0.05) $(0.01)
From discontinued operations $(0.01) $

(**

)
  $(0.06) $(0.01)
         
Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share  53,824,377   47,790,091 

  Three months ended
March 31
 
  2022  2021 
Revenues      
Sales $2,465  $2,387 
Software as a Service (“SaaS”)  428   382 
         
Total revenues  2,893   2,769 
         
Cost of revenues        
Cost of sales  1,543   1,366 
Total cost of revenues  1,543   1,366 
         
Gross profit  1,350   1,403 
Operating expenses        
Research and development  731   838 
Selling and marketing  580   605 
General and administrative  853   746 
         
Total operating expenses  2,164   2,189 
         
Operating loss from continuing operations  (814)   (786)
         
Loss from change in fair value of embedded derivative  -   (1,974)
Other financial (expenses) income, net  (146  4 
Financial (expenses) income, net  (146)  (1,970)
         
Loss from continuing operations before taxes on income  (960)  (2,756)
         
Income tax benefits, net  -   13 
         
Loss from continuing operations  (960)  (2,743)
Loss from discontinued operations  -   (418)
         
Net loss $(960) $(3,161)
Basic and diluted net loss attributable to shareholders per ordinary share        
From continuing operations $(0.01 $(0.05)
From discontinued operations $ (0.00) $(0.01)
  $(0.01)  $(0.06)
Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share  72,789,893   57,470,208 

(*)Reclassified to conform with the current period presentation, see Note 1C(2).

(**)Less than $0.01 per ordinary share.

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 


F-4

On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Statements of Comprehensive Loss

US dollars in thousands

  

Three months ended
March 31

 
  

2021

  

(*) 2020

 
Total comprehensive loss:        
Net loss $(3,161) $(669)
Exchange differences on translation of foreign continuing operations  (85)  18 
Exchange differences on translation of foreign discontinued operations  (52)  (312)
         
Total comprehensive loss $(3,298) $(963)

  Three months ended
March 31
 
  2022  2021 
Total comprehensive loss:        
Net loss $(960) $(3,161)
Exchange differences on translation of foreign continuing operations  1   (85)
Exchange differences on translation of foreign discontinued operations  -   (52)
Total comprehensive loss $(959) $(3,298)

(*)Reclassified to conform with the current period presentation, see Note 1C(2).

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

F-5

 


On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Statements of Changes in Equity

US dollars in thousands

  Number of     Additional  Treasury  Accumulated other comprehensive      
  Shares  Share  paid-in  Shares  Income  Accumulated  Total 
  

issued

  

capital

  

capital

  

(at cost)

  

(loss)

  

deficit

  

equity

 
Balance as of December 31, 2019  47,963,076  $1,226  $225,970  $(2,000) $(974) $(216,832) $7,390 
                             
Changes during the three month period ended March 31, 2020:                            
                             
Issuance of shares, net of issuance costs of $8  1,040,000   30   170   -   -   -   200 
Stock-based compensation  -   -   12   -   -   -   12 
Foreign currency translation adjustments  -   -   -   -   (294)  -   (294)
Net loss  -   -   -   -   -   (669)  (669)
Balance as of March 31, 2020  49,003,076  $1,256  $226,152  $(2,000) $(1,268) $(217,501) $6,639 
                             
Balance as of December 31, 2020  55,003,076  $1,423  $227,209  $(2,000) $(961) $(222,965) $2,706 
                             
Changes during the three month period ended March 31, 2021:                            
                             
Classification of embedded derivative from liability to equity (*)  -   -   3,566   -   -   -   3,566 
Stock-based compensation  -   -   14   -   -   -   14 
Foreign currency translation adjustments  -   -   -   -   (137)  -   (137)
Net loss  -   -   -   -   -   (3,161)  (3,161)
Balance as of March 31, 2021  55,003,076  $1,423  $230,789  $(2,000) $(1,098) $(226,126) $2,988 

              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, 2020  55,003,076  $1,423  $227,209  $(2,000) $(961) $(222,965) $2,706 
                             
Changes during the three month period ended March 31, 2021:                            
Classification of embedded derivative from liability to equity  -   -   3,566   -   -   -   3,566 
Stock-based compensation  -   -   14   -   -   -   14 
Foreign currency translation adjustments  -   -   -   -   (137)  -   (137)
Net loss  -   -   -   -   -   (3,161)  (3,161)
Balance as of March 31, 2021  55,003,076  $1,423  $230,789  $(2,000) $(1,098) $(226,126) $2,988 
                             
Balance as of December 31, 2021  76,954,092  $2,008  $233,462  $(2,000) $(348) $(234,624) $(1,502)
                             
Changes during the three month period ended March 31, 2022:                            
                             
Stock-based compensation  -   -   36   -   -   -   36 
Foreign currency translation adjustments  -   -   -   -   1   -   1 
Net loss  -   -   -   -   -   (960)  (960)
Balance as of March 31, 2022  76,954,092  $2,008  $233,498  $(2,000) $(347) $(235,584) $(2,425)

(*)See Note 5

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

F-6

 


On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Statements of Cash Flows

US dollars in thousands

  

Three months ended
March 31

 
   2021   (*) 2020
Cash flows from continuing operating activities        
Net loss from continuing operations $(2,743) $(576)
Adjustments required to reconcile net loss to net cash provided by continuing operating activities:        
Stock-based compensation related to options issued to employees and others  14   12 
Accrued interest and linkage differences, net  (169)  (156)
Transaction expenses related to convertible short-term loan received from shareholders  10   - 
Loss from change in fair value of embedded derivative  1,974   - 
Depreciation and amortization  100   108 
Deferred tax benefits, net  (13)  (11)
Changes in operating assets and liabilities:        
Change in accrued severance pay, net  (13)  (8)
Increase in trade receivables, net  (764)  (867)
Decrease in other receivables and prepaid expenses  50   55 
Decrease in inventories  110   386 
(Decrease) increase in trade payables  (169)  429 
Increase in other current liabilities  152   596 
Net cash used in continuing operating activities  (1,461)  (32)
         
Cash flows from continuing investing activities        
Purchase of property and equipment and intangible assets  (29)  (103)
Change in short-term investments, net  -   1,509 
Net cash (used in) provided by continuing investing activities  (29)  1,406 
         
Cash flows from continuing financing activities        
(Decrease) increase in short-term bank credit, net  (1,160)  111 
Convertible short-term loan received from shareholders, net of transaction expenses  961   - 
Repayment of long-term loans  (2)  (5)
Proceeds from issuance of shares, net of issuance costs  -   200 
Net cash (used in) provided by continuing financing activities  (201)  306 
         
Net cash provided by (used in) discontinued operating activities  3   (1,434)
Net cash provided by (used in) discontinued investing activities  2,091   (66)
Net cash provided by discontinued financing activities  -   49 
Total net cash provided by (used in) discontinued operations  2,094   (1,451)
         
Effect of exchange rate changes on cash and cash equivalents  (98)  (135)
         
Increase in cash, cash equivalents and restricted cash  305   94 
Cash, cash equivalents and restricted cash - beginning of the period (**)  2,499   2,648 
         
Cash, cash equivalents and restricted cash - end of the period (**) $2,804  $2,742 

  Three months ended
March 31
 
  2022  2021 
Cash flows from continuing operating activities      
Net loss from continuing operations $(960) $(2,743)
Adjustments required to reconcile net loss to net cash provided by continuing operating activities:        
Stock-based compensation related to options, restricted stock awards and shares issued to employees and others  36   14 
Accrued interest and linkage differences, net  (51)  (169)
Transaction expenses related to convertible loan received  108   10 
Loss from change in fair value of embedded derivative  -   1,974 
Depreciation and amortization  83   100 
Deferred tax benefits, net  -   (13)
Changes in operating assets and liabilities:        
Change in accrued severance pay, net  16   (13)
Increase (decrease) in trade receivables, net  1,310   (764)
Decrease (increase) in other receivables and prepaid expenses  (406)  50 
Decrease (increase) in inventories  (198)  110 
(Decrease) in trade payables  (2,435)  (169)
(Decrease) increase in other current liabilities  (269)  152 
Net cash used in continuing operating activities  (2,766)  (1,461)
         
Cash flows from continuing investing activities        
Purchase of property and equipment and intangible assets  (59)  (29)
         
Net cash used in continuing investing activities  (59)  (29)
         
Cash flows from continuing financing activities        
Increase in short-term bank credit  2,000   - 
Repayment of short-term bank credit  (2,054)  (1,160)
Repayment of convertible short-term loan received from shareholders, net of transaction expenses  (1,758)  961 
Convertible loan received from Nayax  5,500   - 
Repayment of long-term loans  (8)  (2)
Net cash provided by (used in) continuing financing activities  3,680   (201)
         
Net cash (used in) provided by discontinued operating activities  (19)  3 
Net cash provided by discontinued investing activities  -   2,091 
Net cash provided by discontinued financing activities  -   - 
         
Total net cash (used in) provided by discontinued operations  (19)  2,094 
         
Effect of exchange rate changes on cash and cash equivalents  (5)  (98)
         
Increase in cash, cash equivalents and restricted cash  830   305 
Cash, cash equivalents and restricted cash - beginning of the period  920   2,499 
         
Cash, cash equivalents and restricted cash - end of the period $1,750  $2,804 

(*)Reclassified to conform with the current period presentation, see Note 1C(2).

(**)Including cash and cash equivalents from discontinued operations held for sale. See also Note 8.

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

F-7

 


On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont’d)

US dollars in thousands

  

Three months ended
March 31

 
  

2021

  

2020

 
Supplementary cash flows activities:        
Cash paid during the period for:        
Interest paid $(*) 22 $23 
Income taxes paid $-  $(**) 31
Income tax refund received $6  $- 

  Three months ended
March 31
 
  2022  2021 
Supplementary cash flows activities:      
Cash paid during the period for:        
Interest paid $169  $(*)22 
Income taxes paid $27  $- 
Income tax refund received $-  $6 

(*)Including $7 that derives from discontinued operations.
(**)Derives from discontinued operations.

Supplemental disclosures of non-cash flow information      
Payables due to transaction expenses related to convertible short-term loan received from shareholders $38  $- 
Payables due to purchase of property and equipment and intangible assets $30  $62 
Payables due to purchase of property and equipment and intangible assets from discontinued operations - held for sale $-  $(*) 112
Classification of embedded derivative from liability to equity $3,566  $- 

Supplemental disclosures of non-cash flow information      
Payables due to transaction expenses related to convertible short-term loan received $95  $38 
Payables due to purchase of property and equipment and intangible assets $-  $30 
Classification of embedded derivative from liability to equity $-  $3,566 

(*)Derives from discontinued operations

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

 


F-8

On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 1 - Organization and Basis of Presentation

A.Description of business

On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together, the “Group”) are principally engaged in the field of design and development of cashless payment solutions.

The Company’s ordinary shares are quoted for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 31, 2019).

On January 10, 2022, the Company filed a petition (the “Petition”) with the Israeli county court of Nazareth, seeking protections from its creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after the Company’s Board of Directors determined that the Company is insolvent from a cash flow perspective.

On January 19, 2022, the Company entered into a binding term sheet (the “Term Sheet”), with Nayax Ltd. (“Nayax”). The Term Sheet provides that the Company and Nayax will enter into a two-step transaction relating to (i) Nayax extending to the Company a senior secured convertible loan in amount of $5,500 (the “Nayax Loan”), and (ii) the purchase by Nayax of 100% of the Company’s share capital in consideration for $4,500. Consequently, to the entry into the Term Sheet, and at the Company’s request, the Israeli county court of Nazareth dismissed the Petition.

On January 27, 2022 (the “Effective Date”), the Company entered into a definitive agreement and debenture relating to the Nayax Loan (the “Nayax Loan Agreement”). On March 17, 2022, the Company entered into an Agreement and Plan of Merger, with Nayax and OTI Merger Sub Ltd., an |Israeli company, wholly owned by Nayax, (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving as a direct wholly-owned subsidiary of Nayax, in exchange for $4,500 in cash (the “Merger”).

On May 10, 2022, the Merger was approved by the shareholders of the Company. The completion of the Merger is further subject to the applicable waiting periods as follows: (i) the lapse of a 50-day waiting period counted as of the filing of the Merger proposal with the Israeli Registrar of Companies, which was filed on April 7, 2022, and (ii) the lapse of a 30-day waiting period counted as of the date of approval of the Merger by the shareholders (i.e., May 10, 2022), as well as the delivery of notifications to the creditors of the Company, and all in accordance with applicable law and the fulfillment of certain closing conditions.

At March 31, 2021,2022, the Company operates in two operating segments: (a) Retail, and (b) Petroleum (see Note 11). The Company completed the sale of its Mass Transit Ticketing operation in April 2021, subsequent to the balance sheet date (see Note 1C(2)). The Company has determined that the sale of the Mass Transit Ticketing business qualifies as held for sale and as a discontinued operation as of March 31, 2021 and December 31, 2020. 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

B.Interim Unaudited Financial Information

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2021 that the Company filed with the U.S. Securities and Exchange Commission on April 13, 2022, as amended on April 15, 2022.

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 three month period ended March 31, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022.

Use of Estimates:Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive loss that are reported in the Interim Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.

F-9

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

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

C.Divestiture of operationsLiquidity and Capital Resources

1.In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property relating to its Smart ID division, for a total purchase price of $10,000 in cash and an additional $12,500 subject to performance-based milestones. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively,

The Company has had recurring losses and cash outflows from operating activities. It has an accumulated deficit as discontinued operations separately from continuing operations.

On April 20, 2016, the purchaser of the Smart ID division, SuperCom Ltd. (“SuperCom”),March 31, 2022 of $233,498 and a shareholder’s deficit of $2,425. As of March 31, 2022 the Company entered intoalso has a settlement agreement resolving certain litigation between SuperCompayable balance on its short-term bank loan, that is due within the next 12 months of $2,001 and a convertible short-term loan from Nayax including accrued interest, of $5,595. On January 10, 2022, the Company pursuant to which SuperCom paidfiled the Company $2,050 and agreed to payPetition with the Company up to $1,500Court, seeking protections from its creditors in accordance with the Israeli Insolvency and subject to a certain earn-out mechanism. In November 2017, the Company commenced an arbitration procedure with SuperCom, in which the Company claims that additional earn-out payments have not been paid to the Company. SuperCom raised claims against the Company during the arbitration for material damages. An arbitration decision was issued on December 24, 2018 inEconomic Rehabilitation Law-2018, after the Company’s favor and denied SuperCom’s claims. The arbitrator ordered SuperCom to disclose the financial information regarding the earn-out paymentsBoard of Directors determined that the Company is entitled to receive, and to payinsolvent from a cash flow perspective. However, following the signing of the Term Sheet with Nayax, as mentioned in Note 1A, such Petition was dismissed. At the end of January 2022, the Company accordingly, or otherwise paysigned the Nayax Loan Agreement under which Nayax provided the Company approximately $1,300 that reflectswith a loan in an amount of $5,500, as mentioned in Note 1A, and received the maximum earn-out amount thatproceeds from this Nayax Loan. Consequently, all amounts due under the convertible loan from shareholders (including the Company’s controlling shareholder) and the bank loan, were paid in full. In addition, Nayax has not yet been paidprovided the Company with a full guarantee for a $2,000 short-term loan provided to the Company by SuperCom. The arbitration verdict was approved as a court’s verdict in June 2019, but SuperCom failed to disclosebank at the financial information in the way it should have done according to the arbitration decision. Therefore, in December 2019 the Company submitted a complementary claim to the arbitrator, asking for a final award that includes a final payment by SuperCom (as opposed to merely disclosing information). On January 21, 2021, after conclusionend of the evidence phase in the arbitration,February 2022, and after the Company already filed its summaries, SuperCom submitted new documents claiming that these include the missing financial information. Following the submission of these documents, on February 9, 2021, the Company submitted an application claiming that implementing the contractual sanction mechanism on the amounts presented in these documents testifiesadditional guarantees to the Company’s entitlementsuppliers and subcontractors to allow it to maintain its ongoing production and sale of its products. Subsequent to the maximum earn-outbalance sheet date, On April 26, 2022, Nayax extended an additional amount of $1,000 to the Company, which is added to the previous $5,500 loan and therefore,shall be subject to the arbitratorprovisions of the Nayax Loan.

In the event where the Merger, as mentioned in Note 1A, is requested to order thatnot completed, under certain circumstances, the parties will complete their summaries and then a verdictCompany will be given. On March 8, 2021,required to pay Nayax a termination fee of $1,500. Furthermore, non-completion of the arbitrator acceptedMerger would be considered an “event of default” under the Nayax Loan Agreement, which can result in Nayax’s requirement for an immediate repayment of the Nayax Loan, or an increase of the annual interest on the Nayax Loan from 10% to 16% interest, at Nayax’s sole discretion. At any time after the earlier of (i) an event of default, as contemplated in the Nayax Loan Agreement, or (ii) the completion of the Merger Agreement, and prior to the repayment of the Nayax Loan which shall be due and payable in full by the Company on the second anniversary of the Effective Date, Nayax is entitled, at its sole discretion, to convert the Nayax Loan into ordinary shares of the Company at a price per share equal to $0.043. The Company will also be required to repay the bank loan provided with Nayax’s guarantee and would be exposed to a risk of not being able to conduct the Company’s applicationbusiness due to the loss of the guarantees provided by Nayax to the Company’s suppliers and subcontractors. Based on April 11, 2021,the projected cash flows and the Company’s cash balances as of March 31, 2022, the Company submitted complementary summaries. The Company is now awaitingbelieves that without: (1) the submissioncompletion of SuperCom’s summaries, following whichthe Merger and increase of the Company’s cash by receiving additional loans from Nayax (at Nayax’s sole discretion) under the terms set under the Nayax Loan Agreement; or (2) other increase in the Company’s cash, the Company will not have sufficient resources to enable it to continue its operations for a period of at least the next 12 months from the date of this filing, and may submitneed to commence insolvency proceedings. As a response summary.result, there is substantial doubt regarding the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

F-10

 

The Company records the earn-out payments only when the consideration is determined to be realizable. The Company did not record or receive any contingent consideration during the three months ended March 31, 2021 and 2020.


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

 

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

 

C.Divestiture of operations (cont’d)

2.On March 29, 2021 the Company entered into an agreement (the “Sale Agreement”) for the sale of 100% of the issued and outstanding share capital of its wholly owned Polish subsidiary, ASEC S.A. (“ASEC”), with Vector Software SP. Z O.O. (the “Buyer”). ASEC is headquartered in Krakow, Poland, and has been conducting the Company’s Mass Transit Ticketing business in Europe.

The sale of ASEC was completed on April 21, 2021. The Company has determined that the sale of the Mass Transit Ticketing business qualifies as held for sale and as a discontinued operation as of March 31, 2021 and December 31, 2020. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. In addition, assets and liabilities of the Polish subsidiary and assets and liabilities related to the Mass Transit Ticketing operation that have not yet been actually sold as of March 31, 2021, are presented as assets and liabilities held for sale in the balance sheets as of March 31, 2021 and December 31, 2020.

The consideration for ASEC after reduction of some working capital adjustments, as agreed in April 2021, is approximately $2,700, out of which: (I) approximately $2,100 (the “First Installment”), was transferred from the Buyer to ASEC at the end of March 2021 in order to repay Polish bank loans, out of which approximately $1,700 was repaid as of March 31, 2021 and a loan of approximately $400 was repaid at the beginning of April 2021. The First Installment is presented as held for sale in the balance sheet as of March 31, 2021, and as cash provided by discontinued investing activities in the statements of cash flows for the three months ended March 31, 2021; and (II) $600 (the “Net Consideration”) was paid by the Buyer to the Company in April 2021 and increased the Company’s financial resources. As of March 31, 2021, the Company recognized a loss from impairment of assets in amount of $29 that reflects the difference between the book value of ASEC’s assets, net of liabilities, and the Net Consideration.

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

D.Liquidity and Capital Resources (cont’d)

The Company has had recurring losses and has an accumulated deficit as of March 31, 2021 of $226,126. The Company also has a payable balance on its short-term bank loans, that is due within the next 12 months, of $1,109 and a convertible short-term loan from shareholders of $1,600 (out of which only an amount of $8 is presented as liability), that, if not converted, would mature in the second quarter of 2021 (see also Note 5) as of March 31, 2021. This amount does not include short-term loans held for sale.

Since inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities, (regarding to the issuance of shares during last two years, see Note 10), borrowings from banks, government and shareholders, including convertible loans, proceeds from the exercise of options and warrants as well as proceeds from the divestiture of parts of the Company’s businesses. The Company had cash cash equivalents and short-term investments representing bank deposits of $1,084 (of which an amount of $105 has been pledged as security for certain items), excluding cash and cash equivalents held for sale,of $1,750 as of March 31, 2021.2022.


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars,NIS and EuroThe ongoing situation in thousands, except share and per share data

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

D.Liquidity and Capital Resources (cont’d)

The recent deterioration inPoland resulting from the coronavirus (“COVID-19”) pandemic, situation in Poland led to an almost complete stop to the Company’s Mass Transit Ticketing sales business, which negatively impacted the Company’s cash flow since March 2020.flow. On April 21, 2021, subsequent to the balance sheet date, the Company completed the sale of its subsidiary ASEC S.A., including its Mass Transit Ticketing activity - see Note 1C(2). Further, in December 2020 and January 2021, the Company borrowed a loan, in two tranches aggregating $1,600, from its controlling shareholder and another shareholder that, if not converted, would mature in the second quarter of 2021.

The Company’s management has taken cost reduction steps, including material reductions in the salaries of its management and employees, and has been working for the past few months on updating the Company’s strategy for the coming years in order to realize its potential, resume its growth, and ultimately create shareholder value. The Company is attempting to raise additional funds and to increase its cash. The Company commenced a rights offering in April 2021, which expires in May 2021 – See Note 10B. Based on the commitment letter of the Company’s controlling shareholder pursuant to which it committed to exercise its basic subscription rights as part of the rights offering and its over-subscription privilege for up to approximately $2,800 in the aggregate, subject, however, to the limitations as mentioned in Note 10B, the Company believes that the Company has sufficient capital resources to fund its operations for at least the next 12 months. In addition, the Company engaged an investment bank to explore strategic options and is investing resources in this process.

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

So far, the main direct impact of the COVID-19 pandemic was a decrease in the Company’s revenues derived from Mass Transit Ticketing activity in the Polish market. The revenues from this operation, that were relatively stable during the year preceding the COVID-19 outbreak, decreased by $295 in the first quarter of 2021 compared to the first quarter of 2020, mainly due to lockdowns and other restrictions and consequences of the COVID-19 as started in March 2020. On April 21, 2021, the Company sold ASEC, including its Mass Transit Ticketing activity, as mentioned above.activity. The results, including the revenues, and the cash flows of the Mass Transit Ticketing operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.

Another impact of COVID-19 has been on product delivery, where components’ procurement lead time is longer and a shortage in components has grown asIn connection with the durationoutbreak of the COVID-19 pandemic, the Company has continued.taken steps to protect its workforce in Israel, South Africa, the United States, Poland, and elsewhere. Such steps include working from home where possible, minimizing face-to-face meetings, utilizing video conferencing as much as possible, social distancing at facilities and elimination of most international travel. The Company continues to comply with all local health directives.

The global shortage in components, which caused an increase in components prices, freight cost and longer lead-time, created a delay in fulfilling customers’ orders which adversely impacted the Company’s revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, the Company encouraged its customers to provide a forecast for their demand. The Company continues to maintain a comprehensive network of world-wide suppliers in order to optimize its access to critical components. As long as the COVID-19 pandemic continues, and possibly also thereafter, the components’ lead timelead-time may be longer than normal, and the shortage in components may continue or get worse. Therefore, the Company maintains a comprehensive network of world-wide suppliers.

The Company has seen a higher interest from a growing number of potential customers and partners as they forecasted that the need for the Company’s products will grow, yet execution of closing is still slow due to the current business environment.

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

F-11

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

 

Note 2 - Significant Accounting Policies

Except as described in Note 2A below, these interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

A.Recently Adopted Accounting Pronouncements

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

B.1.RecentIn August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This pronouncement simplifies the accounting pronouncementsfor certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, the ASU simplifies accounting for convertible instruments by removing major separation models required under current accounting standard. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for it and simplifies the diluted earnings per share calculations in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted for annual periods beginning after December 15, 2020. The Company adopted ASU 2020-06 in the first quarter of 2022 using the modified retrospective method. The adoption of this accounting standard did not have a material effect on the Company’s financial position, results of operations and cash flows.

1.B.Recent Accounting Pronouncements

1.In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company currently does not expect the adoption of this accounting standard to have a material impact on its consolidated financial statements.

F-12

 

2.In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This pronouncement simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, the ASU simplifies accounting for convertible instruments by removing major separation models required under current accounting standard. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for it and simplifies the diluted earnings per share calculations in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted for annual period beginning after December 15, 2020. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

 

Note 3 - Other Receivables and Prepaid Expenses

  March 31  December 31 
  

2021

  

2020

 
Government institutions $43  $104 
Prepaid expenses  252   257 
Suppliers advance  293   227 
Other receivables  57   107 
  $645  $695 

  March 31  December 31 
  2022  2021 
Government institutions $373  $149 
Prepaid expenses  197   166 
Suppliers advance  934   791 
Other receivables  57   53 
  $1,561  $1,159 

Note 4 - Other Current Liabilities

  March 31  December 31 
  2021  2020 
Employees and related expenses $691  $516 
Accrued expenses  882   811 
Customer advances  31   142 
Short-term liabilities due to operating leases and current maturities  713   762 
Other current liabilities  30   52 
  $2,347  $2,283 
  March 31  December 31 
  2022  2021 
Employees and related expenses $545  $977 
Accrued expenses  1,101   1,060 
Customer advances  158   64 
Short-term liabilities due to operating leases and current maturities  611   691 
Other current liabilities  49   40 
  $2,464  $2,832 

 


F-13

On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 5 - Convertible short-term loan from shareholdersLoans

1.Convertible short-term loan from Shareholders

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

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

The Loan Agreement includes customary events of default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the Agreement, etc. If an event of default occurs, the Secured Amount shall immediately become due and payable, without the need for any notice by the Lender.

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

On January 28, 2022, the Secured Amount of $1,758 (including accrued interest of $158) was repaid to the Lender and the Additional Lender.

2.Convertible loan from Nayax

On January 27, 2022, the Company entered into a senior secured convertible loan financing agreement with Nayax in the amount of $5,500, which was increased by an additional amount of $1,000 on April 26, 2022, bringing the Loan Amount to a total of $6,500. Nayax may, at its sole discretion, extend additional amounts to the Company under this Agreement in order, among other things, to allow the Company to pay its debts as they become due.

The Loan is subject to a 10% interest per year and the accumulated interest and value added tax, if any, is payable quarterly commencing on April 1, 2022. The accumulated interest accrued for the period between January 27, 2022 to March 31, 2022 is approximately $95 which the Company has not paid to Nayax. The Nayax Loan matures on the second anniversary of the closing of the Loan.

Non-completion of the merger would be considered an “event of default” under the Nayax Loan Agreement, which can result in Nayax’s requirement for an immediate repayment of the Nayax Loan, or an increase of the annual interest on the Nayax Loan from 10% to 16% interest, at Nayax’s sole discretion. At any time after the earlier of (i) an event of default, as contemplated in the Nayax Loan Agreement, or (ii) the completion of the Merger Agreement, and prior to the repayment of the Nayax Loan, Nayax is entitled, at its sole discretion, to convert the Nayax Loan into ordinary shares of the Company at a price per share equal to $0.043.

3.Short-term bank loan

On February 28, 2022, the Company received a $2,000 short-term loan which is being rolled over on a monthly basis (i.e., repaid and re-provided monthly basis). The loan bears an annual interest rate of SOFR plus 2.45%. Nayax has provided the Company a full guarantee for this loan.

F-14

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

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

In accordance with ASC 815-15-25, Derivatives and Hedging, the conversion feature (“the conversion component”) was considered embedded derivative instrument. Since, as described above, the conversion component was required to be approved by the shareholders of the Company, the conversion component did not qualify for the scope exception under ASC 815-10-15-74(a). Therefore, the conversion component is to be recorded separately from the loan component. The conversion component is measured both initially and in subsequent periods until obtaining the shareholders’ approval of the Conversion Right, at fair value, with changes in fair value charged to finance expenses, net.

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

Expected volatility (%)125.2%
Risk-free interest rate (%)0.09%
Expected dividend yield0%
Contractual term (years)0.500
Conversion price (US dollars per share)0.124
Underlying Share price (US dollars per share)0.220

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

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

The fair value of the conversion component at the second closing, January 28, 2021, was estimated using the Trinomial model based on the assumptions, as follows:

Expected volatility (%)103.23%
Risk-free interest rate (%)0.075%
Expected dividend yield0%
Contractual term (years)0.386
Conversion price (US dollars per share)0.124
Underlying Share price (US dollars per share)0.240

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

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

  Conversion
component
  Loan
component
  

Total

 
Initial closing $617  $8  $625 
Second closing  975   -   975 
  $1,592  $8  $1,600 


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

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

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

Expected volatility (%)107.34%
Risk-free interest rate (%)0.044%
Expected dividend yield0%
Contractual term (years)0.296
Conversion price (US dollars per share)0.124
Underlying Share price (US dollars per share)0.390

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

  Conversion component 
Fair value before the shareholders’ approval date $1,592 
Change in fair value (*)  1,974 
Fair value at the shareholders’ approval date $3,566 

(*)This amount is recorded as loss from change in fair value of embedded derivative as part of the financial expenses in the statements of operations.

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

Additional financial expenses derive from the convertible loan are summarized in the table, as follows:

  Three months ended 
  March 31,
2021
  December 31,
2020
 
Transaction expenses $10  $90 
Interest expenses (*)  26   2 
  $36  $92 

(*)Including interest expenses of $25 and $2 to Ivy, the controlling shareholder, during the three months ended March 31, 2021, and December 31, 2020, respectively. The accrued interest expenses are included in ‘other current liabilities’.


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 6 - Commitments and Contingencies

A.Legal claimsOther contingency

1.In June 2013, prior to the Company’s divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liabilities the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions, plus expenses and legal fees, as well as a right to receive additional information from the Company regarding an additional engagement period in Tanzania and a right to possibly receive additional amounts from the Company, if at all, according to the information that will be provided. The arbitration decision had been appealed and the appeal was denied on June 17, 2018. In order to collect the award, Merwell filed a motion against the Company and the Nazareth District Court issued a judgment requiring the Company to pay Merwell an amount of NIS 5,080 (approximately $1,370) that was paid by the Company on January 8, 2019.

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

Despite the fact that, based on the assessment of the Company’s external legal counsel, the likelihood to succeed in the arbitration process (or other legal procedure in that matter) is high, the Company did not record an indemnification asset as of March 31, 2021, and December 31, 2020, in accordance with accounting standard ASC 450, “Contingencies”.

2.On June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration, with respect to the additional financial details that Merwell claims that the Company was ordered to provide according to the arbitration verdict from February 21, 2016, and additional payments that Merwell claims that the Company is obligated to pay Merwell. The said financial details refer to the quantity of smart driving licenses that Merwell claims were issued in the later period of a project in Tanzania in which Merwell claims to have provided services to the Company. Merwell claims that despite the Company’s failure to provide the details, Merwell obtained the details independently from other sources, and they indicate that the Company is obligated to pay Merwell an additional amount of approximately $1,618, and there might be additional amounts to be claimed in the future, as additional information might be found from time to time. On March 4, 2020, the Company submitted a response to this complementary claim, rejecting Merwell’s claims. On September 16, 2020, Merwell filed a request to amend the additional amount claimed from approximately $1,618 to approximately $3,012. On April 8, 2021, the arbitrator ordered the parties to submit their written testimonies – Merwell by May 8, 2021, and the Company by June 8, 2021. As mentioned above, the Company is conducting in parallel a separate arbitration process against SuperCom in that matter, as the Company deems SuperCom to be liable for all the costs and liabilities arising out of this claim. Based on the assessment of the Company’s external legal counsel, given the preliminary stage of the procedure, it is difficult, at this point, to estimate the chances of Merwell’s claims for a complementary arbitration verdict.


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 6 - Commitments and Contingencies (cont’d)

A.Legal claims (cont’d)

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 $1,760) and is based on the allegation that the plaintiff sustained certain losses in connection with Defendants not granting the plaintiff exclusive marketing rights to distribute and operate the Defendants’ PIAF Parking System in Paris and the Ile of France. On October 25, 2017, the Court issued its ruling in this matter dismissing all claims against the Company but ordering Parx France to pay the plaintiff €50 ($59) plus interest in damages plus another approximately €5 ($6) in other fees and penalties. As, in accordance with the sale agreement signed between the Company and Parx France, the Company is liable and shall indemnify Parx France for any amount ruled against it as part of that claim, the Company offered to pay the amounts mentioned above to the plaintiff in consideration for not filing future appeals. The Plaintiff rejected this offer and filed an appeal against Parx France and the Company claiming the sum of €503 ($590) plus interest and expenses. On November 7, 2019, the Company’s external legal counsel concluded that the appeal was inadmissible, and that it believed that the opposing claims would be dismissed. The case was pleaded before the Court and the Court is to provide its decision by July 1, 2021. Based on the assessment of the Company’s external legal counsel, the Company’s management is of the opinion that the chances of the appeal being approved against the Company are low.

4.In July 2019, the Company received a request (the “Request”), to allow a petitioner to submit a class action, which concerns the petitioner’s claims that, inter alia, through the EasyPark card, drivers are permitted to exceed the quota of permitted hours in accordance with the instructions of various local authorities in Israel. The Request was submitted against a company incorporated by the buyer of the assets (including the parking activity) of the Israeli subsidiaries of the Company (the “Company’s Subsidiaries”) and against two other companies that operate technological means for payment for public parking spaces scattered throughout the cities. Since the majority of potential claims against the Company’s Subsidiaries relate to the period following the sale of the Company’s Subsidiaries’ assets, including the parking activity, it appears that the Company’s exposure through this channel is limited. Furthermore, even if payment will be required, the buyer would be liable for the majority of such payment. Therefore, the Company will not participate in such procedure at this stage. Based on the assessment of the Company’s external legal counsel, the exposure of the Company is low.

5.The Company has been responding to a Subpoena from the Department of Justice and a document request from the Securities and Exchange Commission relating to an inquiry concerning a press release the Company issued on December 18, 2017. The Company has produced the requested documents, participated in voluntary interviews, and is otherwise cooperating with the inquiry. At present, the Company has not been accused of any wrongdoing and it does not currently view the inquiry as material.

6.Regarding additional legal claims, see Note 1C(1).


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 6 - Commitments and Contingencies (cont’d)

B.Other contingency

The Company has entered into several research and development agreements, pursuant to which the Company received grants from the Israel Innovation Authority (“IIA”), and is therefore obligated to pay royalties to the IIA at a rate of 3%-3.5% of its sales up to the amounts granted (linked to the U.S. dollar with annual interest at LIBOR as of the date of approval, for programs approved from January 1, 1999 and thereafter). The total amount of grants received as of March 31, 2021,2022, net of royalties paid, was approximately $3,400 (including accrued interest). No grants from the IIA were received during the three months ended March 31, 20212022 and 2020.2021.

There is a dispute between the Company and the IIA in the amount of approximately NIS 3,5713,600 ($1,071)1,133) including accrued interest (while the current debt to the IIA as presented in the Company’s financial statements amounts to approximately $167)$122) due to a claim of the IIA about miscalculations in the amount of royalties paid by the Company and the revenues on which the Company must pay royalties. The Companycompany has not yet completed its discussions with the IIA and intends to exhaust all options in order to resolve this matter in a favorable manner. Management believes that, at the current stage, it is more likely than not that a positive resolution will be applied to this dispute. Accordingly, no additional accrual has been recorded in the financial statements in respect of this matter.

During the three months ended March 31, 20212022 and 2020,2021, there were no royalty expenses.

C.B.Guarantees

As of March 31, 2021,Nayax has provided the Company grantedwith a full guarantee in amount of $105, with an expiration date in May 2024. In addition, as of March 31, 2021,for a $2,000 short-term loan provided to the Company granted performanceby a bank, and additional guarantees in amount of $278 related to the Mass Transit Ticketing activity. The expiration dates of those guarantees ranged from April 2021Company’s suppliers and subcontractors to September 2021. Following theallow it to maintain its ongoing production and sale of ASEC (see Note 1C(2)), the Company is no longer subject to these guarantees in an amount of $278.its products.

F-15

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 7 - Revenues

Disaggregation of revenue

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 three months ended March 31, 20212022 and 2020:2021:

  Three months ended
March 31 2021
 
  Retail  Petroleum  Total 
Cashless payment products (A) $1,524  $-  $1,524 
             
Complete cashless payment solutions (B):            
Sales of products (B1)  421   239   660 
SaaS and services (B2)  337   248   585 
   758   487   1,245 

Total revenues

 $2,282  $487  $2,769 

  Three months ended
March 31 (*) 2020
 
  Retail  Petroleum  Total 
Cashless payment products (A)
 $2,391  $-  $2,391 
             
Complete cashless payment solutions (B):            
Sales of products (B1)  279   571   850 
SaaS and other services (B2)  199   227   426 
   478   798   1,276 
Total revenues $2,869  $798  $3,667 

  Three months ended March 31 
  2022 
  Retail  Petroleum  Total 
Cashless payment products (A) $1,705  $-  $1,705 
Complete cashless payment solutions (B):            
Sales of products (B1)  99   557   656 
SaaS and services (B2)  311   221   532 
   411   778   1,188 
             
Total revenues $2,115  $778  $2,893 

  Three months ended March 31 
  2021 
  Retail  Petroleum  Total 
Cashless payment products (A) $1,524  $-  $1,524 
Complete cashless payment solutions (B):            
Sales of products (B1)  421   239   660 
SaaS and other services (B2)  337   248   585 
   758   487   1,245 
             
Total revenues $2,282  $487  $2,769 

(*)Reclassified to conform with the current period presentation, see Note 1C(2).

Performance obligations

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

A.Cashless payment products –

The performance obligation is the selling of contactless payment products. Most of those products are Near Field Communication (NFC) readers. For such sales the performance obligation, transfer of control and revenue recognition occur when the products are delivered.

F-16

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 7 - Revenues (cont’d)

Performance obligations (cont’d)

B.Complete cashless payment solutions –

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

1.Sales of products –

Selling of contactless payment products (see A above) together with payment gateways and machine-to-machine controllers.

Selling of petroleum payment solutions including site and vehicle equipment.

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

2.SaaS and other services -

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

To provide terminal management system licensing for software that is responsible for remote terminal management and cloud-based software licensing which provide data insights. For such services, the revenue recognition occurs as the services are rendered since the performance obligation is satisfied over time.

To provide technical and customer services for products. For such services, the performance obligation is satisfied over time and therefore revenue recognition occurs as the services are rendered.

The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations. The cost to the Company of this warranty is insignificant.

Contract balances

  March 31  December 31 
  2021  2020 
Trade receivables, net of allowance for doubtful accounts $1,759  $1,148 
Customer advances $31  $142 
  March 31  December 31 
  2022  2021 
Trade receivables, net of allowance for doubtful accounts $1,956  $3,274 
Customer advances $158  $64 

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

F-17

 

Transaction price and variable consideration

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration, revenue is recognized over time as it is mainly attributed to ongoing services provided.


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 8 - Discontinued operations

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

 

Set forth below are the results of the discontinued operations:

  Three months ended
March 31
 
  2021  (*) 2020 
Revenues $488  $783 
Expenses  (877)  (876)
Other loss, net  (29)  - 
Net loss from discontinued operations $(418) $(93)

(*)Reclassified to conform with the current period presentation, see Note 1C(2).
  Three months ended March 31 
  2022  2021 
Revenues $       -  $488 
Expenses  -   (877)
Other loss, net  -   (29)
Net loss from discontinued operations $-  $(418)

The following table summarizes information about assets and liabilities from discontinued operations held for sale as of March 31, 2021 and December 31, 2020:

  March 31,  December 31, 
 

2021

  

2020

 
Assets held for sale from discontinued operations:      
Current assets:        
Cash and cash equivalents $1,720  $1,017 
Trade receivables, net of allowance for doubtful accounts of $42  348   409 
Other receivables and prepaid expenses  544   454 
Inventories  384   392 
Property, plant and equipment, net of impairment of $29 (see Note 1C(2))  2,738   3,136 
Intangible assets, net  326   370 
Right-of-use assets due to operating leases  499   580 
   6,559   6,358 
         
Liabilities held for sale from discontinued operations:        
Current liabilities:        
Short-term bank credit and current maturities of long-term loans  583   2,339 
Trade payables  1,846   1,832 
Other current liabilities  2,503   443 
Long-term loans, net of current maturities (*)  608   642 
Long-term liabilities due to operating leases, net of current maturities (*)  341   401 
Deferred tax liability  78   172 
   5,959   5,829 

(*)Those liabilities were received for a long-term (more than twelve months) in ASEC, but are presented as held for sale within the current assets as of March 31, 2021, and December 31, 2020, because the Company has determined that the sale of ASEC qualifies as held for sale and as a discontinued operation as of those dates.


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 9 - Fair Value of Financial Instruments

The Company’s financial instruments consist mainly of cash and cash equivalents, short-term interest bearing investments, accounts receivable, restricted deposits for employee benefits, accounts payable and short-term, long-term loans and long-term loans.convertible loan from Nayax.

Fair value for the measurement of financial assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes a valuation hierarchy for disclosure of the inputs for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

By distinguishing between inputs that are observable in the market place, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company, in estimating fair value for financial instruments, determined that the carrying amounts of cash and cash equivalents, trade receivables, short-term bank credit and trade payables are equivalent to, or approximate their fair value due to the short-term maturity of these instruments. The carrying amounts of variable interest rate long-term loans and convertible loan from Nayax are equivalent or approximate to their fair value as they bear interest at approximate market rates. The liabilities held for sale include a long-term loan, that does not bear any interest, but 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 March 31, 2021, the Company held approximately $105 of short-term bank deposits (as of December 31, 2020 - $105). As of March 31, 2021, and December 31, 2020, short-term deposits in the amount of $105 have been pledged as security in respect of guarantees granted and cannot be pledged to others or withdrawn without the consent of the bank.

Derivatives

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

F-18

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 10 - Equity

A.Share capital

On December 23, 2019, the Company entered into a share purchase agreement (the “Agreement”) with Ivy and two other investors (collectively together with Ivy – “Investors”). The Agreement relates to a private placement of an aggregate of up to 12,500,000 ordinary shares of the Company for aggregate gross proceeds to the Company of up to $2,500.

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

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

The issuance costs were approximately $39 and $111 during 2020 and 2019, respectively. The issuance costs were approximately $8 during the first quarter of 2020.

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

Regarding a convertible loan that the Company received from Ivy in December 2020 and January 2021, see Note 5.

B.Rights Offering

We are currently conducting a rights offering (the “Rights Offering”), pursuant to a prospectus dated April 20, 2021, under which we are offering our shareholders the ability to exercise subscription rights and purchase, for every subscription right held by them as of April 14, 2021 (i.e. the record date), one ordinary share of the Company, at a purchase price of $0.174 per share, before the expiration of the Rights Offering, which is scheduled for May 19, 2021. In the event the Rights Offering will be fully subscribed for and exercised, the Company shall issue an amount of up to 18,965,517 ordinary shares for an aggregate amount of up to $3,300.

For the purpose of securing a full subscription, Ivy, the Company’s controlling shareholder, has provided a commitment letter pursuant to which it committed to fully exercise its right, while additionally requesting to exercise additional rights un-subscribed for, for up to approximately $2,825 in the aggregate, subject, however, to the limitation that such holdings, including any of its affiliates, will not exceed 45% or more of the Company’s issued and outstanding share capital after conclusion of the Rights Offering (the “Backstop Commitment”). Ivy will not receive any fee in connection with the Backstop Commitment. As of the date of this Form 10-Q, Ivy and its affiliates own approximately 28.4% of our issued and outstanding shares.


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 10 – Equity (cont’d)

C.Stock option plans

During each of the three-month periods ended March 31, 20212022 and March 31, 2020,2021, 0 and 632,500 and 204,000 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 three months ended March 31, 2021, and March 31, 2020, are $0.23, and $0.28, 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 three months ended March 31, 2021 and March 31, 2020 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:

  

Three months ended
March 31

 
  

2021

  

2020

 
Expected dividend yield  0%  0%
Expected volatility (average)  113.48%  102.45%
Risk-free interest rate (average)  0.17%  0.65%
Expected life - in years  2.50   2.44 
  Three months ended
March 31
 
  2022  2021 
Expected dividend yield         -   0%
Expected volatility (average)  -   113.48%
Risk-free interest rate (average)  -   0.17%
Expected life - in years  -   2.50 

1.Dividend yield of zero percent for all periods.

 

2.Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on Nasdaq and on the OTCQX market, as applicable.

 

3.Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

 

4.Estimated expected lives are based on historical grants data.

The Company’s options activity (including options to non-employees) and options outstanding and options exercisable as of December 31, 20202021 and March 31, 2021,2022, are summarized in the following table:

  

Number of
options
outstanding

  

Weighted
average
exercise
price per share

 
Outstanding – December 31, 2020  1,443,333  $0.54 
         
Options granted  632,500   0.23 
Options expired or forfeited  (114,665)  0.72 
Outstanding – March 31, 2021  1,961,168  $0.43 
         
Exercisable as of:        
December 31, 2020  681,330  $0.83 
March 31, 2021  685,014  $0.76 

  Number of  Weighted 
  options  average
exercise
 
  outstanding  price per share 
Outstanding – December 31, 2021  649,000  $0.42 
         
Options granted  -   - 
Options expired or forfeited  (37,998) $0.24 
Outstanding – March 31, 2022  611,002  $0.43 
         
Exercisable as of:        
December 31, 2021  139,678  $0.85 
March 31, 2022  288,682  $0.54 

F-19

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 10 - Equity (cont’d)

C.A.Stock option plans (cont’d)

The weighted average fair value of options granted during the three months ended March 31, 2021 and during the three months ended March 31, 2020 is $0.14 and $0.11, respectively, per option.

The aggregate intrinsic value of outstanding options as of each of March 31, 20212022 and December 31, 20202021 is $222 and $5, respectively.$0. The aggregate intrinsic value of exercisable options as of each of March 31, 20212022 and December 31, 20202021 is $36 and $2, respectively.$0.

The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of March 31, 2021:2022:

   

Options outstanding

  

Options Exercisable

 
   Number  Weighted     Number  Weighted    
   outstanding  average  Weighted  Outstanding  average  Weighted 
   as of  remaining  Average  as of  remaining  Average 
  March 31,  contractual  Exercise  March 31,  contractual  Exercise 
Range of exercise price ($)  2021  life (years)  Price ($)  2021  life (years)  Price ($) 
0.20-0.90   1,605,168   4.20   0.28   329,014   3.72   0.35 
1.07-1.22   356,000   1.11   1.13   356,000   1.11   1.13 
    1,961,168   3.64       685,014   2.36     
   Options outstanding  Options Exercisable 
   Number  Weighted     Number  Weighted    
   outstanding  average  Weighted  Outstanding  average  Weighted 
   as of  remaining  Average  as of  remaining  Average 
Range of  March 31,  contractual  Exercise  March 31,  contractual  Exercise 
exercise price ($)  2022  life (years)  Price ($)  2022  life (years)  Price ($) 
 0.20-0.84   509,002   3.34   0.43   221,682   2.96   0.34 
 1.07-1.22   102,000   0.66   1.21   67,000   0.66   1.21 
     611,002   2.89       288,682   2.43     

As of March 31, 2021,2022, there was approximately $168$61 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 1.531.15 years.

During the three months ended March 31, 2021, and March 31, 2020, the Company recorded stock-based compensation expenses in the amount of $14 and $12, respectively, in accordance with ASC 718, Compensation-Stock Compensation.

DB.Equity Incentive Plan

On July 19, 2021, and September 22, 2021, each of the compensation committee of the Board (the “Committee”) and the Board approved a new incentive plan (the “Equity Incentive Plan”). In the fourth quarter of 2021, following the filing of the Equity Incentive Plan with the Israeli Tax Authorities, the waiver of certain options and signing of appropriate grant documents by the grantees, the Company granted 2,985,500 restricted shares (“RSAs”) to employees pursuant to the Equity Incentive Plan with a concurrent cancelation of options granted to some executive officers in previous quarters. The RSAs will vest over an up to three-year vesting period. RSAs to the directors of the Company, had been subject, in addition to the conditions set forth above, to the approval of the amended compensation policy in the annual general meeting of the shareholders of the Company, which was occurred on December 2, 2021.

F-20

On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 10 - Equity (cont’d)

B.Equity Incentive Plan (cont’d)

The Company does not plan to issue any additional securities under its 2001 Stock Option Plan. The company granted RSAs, among others, to some executive officers in exchange for their agreement to forfeit their outstanding options that were granted under the 2001 Stock Option Plan. The cancelation of the existing equity-classified award along with a concurrent grant of a replacement award, was accounted for as a modification. The modification amount resulted in an insignificant incremental fair value.

The fair value of each RSA granted to employees was calculated based on the intrinsic value on the grant date.

The Company’s RSA activity during 2022 and information as to RSAs outstanding and RSAs exercisable as of March 31, 2022 is summarized in the following table:

    Weighted 
  Number of
  average
exercise
 
  RSAs
outstanding
  price per share 
Outstanding – December 31, 2021  2,985,500  $0.03 
         
RSAs granted  255,000  $0.03 
RSAs expired or forfeited  (315,500) $0.03 
         
Outstanding – March 31, 2022  2,925,000  $0.03 
         
Exercisable as of:        
         
December 31, 2021  189,682  $0.03 
March 31, 2022  38,848  $0.03 

F-21

On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 10 - Equity (cont’d)

B.Equity Incentive Plan (cont’d)

The weighted average grant date fair value of RSAs granted is $0.03 per RSA during 2021.

The aggregate intrinsic value of outstanding options as of March 31, 2022 and December 31, 2021 is $273 and $269, respectively. The aggregate intrinsic value of exercisable options as of March 31, 2022 and December 31, 2021 is $4 and $17, respectively.

The following table summarizes information about RSAs outstanding and exercisable as of March 31, 2022:

   

RSAs outstanding

  

RSAs exercisable

   Number     Number    
   outstanding  Weighted  Outstanding  Weighted 
   as of  Average  As of  Average 
Range of  March 31,  Exercise  March 31,  Exercise 
exercise price  2022  Price  2022  Price 
$0.03   2,925,000  $0.03   38,848  $0.03 

As of March 31, 2022, there was $298 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.53 years.

C.During the three months ended March 31, 2022, and March 31, 2021, the Company recorded stock-based compensation expenses in the amount of $36 and $14, respectively, in accordance with ASC 718, Compensation-Stock Compensation.

D.Stock options and warrants in the amounts of 15,086,837130,727,281 and 1,008,00015,086,837 outstanding as of March 31, 20212022 and 2020,2021, respectively, have been excluded from the calculation of the diluted net loss per ordinary share because all such securities have an anti-dilutive effect for all periods presented.

F-22

 


On Track Innovations Ltd.

and its Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 11 - Operating segmentsSegment Reporting

For the purposes of allocating resources and assessing performance in order to improve profitability, the Company’s chief operating decision maker (“CODM”) examines two segments which are the Company’s strategic business units: (1) Retail, and (2) Petroleum.

Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.

  Three months ended
March 31, 2021
 
  Retail  Petroleum  Total 
Revenues $2,282 $487 $2,769
Reportable segment gross profit (**)  1,179   233   1,412 
             
Reconciliation of reportable segment gross profit to gross profit for the period Depreciation          (8)
Stock-based compensation          (1)
Gross profit for the period in the consolidated financial statement         $1,403 

  Three months ended
March 31, 2020 (*)
 
  Retail  Petroleum  Total 
Revenues $2,869 $798 $3,667
Reportable segment gross profit (**)  1,333   323   1,656 
             
Reconciliation of reportable segment gross profit to gross profit for the period Depreciation          (9)
Stock-based compensation          (1)
Gross profit for the period in the consolidated financial statement         $1,646 

  Three months ended
March 31, 2022
 
  Retail  Petroleum  Total 
          
Revenues $2,116 $777 $2,893
             
Reportable segment gross profit (*)  898   442   1,340 
             
Reconciliation of reportable segment            
gross profit to gross profit for the period            
             
Depreciation          (7)
Stock-based compensation          (3)
             
Gross profit         $1,350 

  Three months ended
March 31, 2021
 
  Retail  Petroleum  Total 
          
Revenues $2,282 $487 $2,769$
             
Reportable segment gross profit (*)  1,179   233   1,412 
             
Reconciliation of reportable segment            
gross profit to gross profit for the period            
             
Depreciation          (8)
Stock-based compensation          (1)
             
Gross profit         $1,403 
             

(*)Reclassified to conform with the current period presentation, see Note 1C(2).

(**)Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.


On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

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

Note 12 - Related party

Regarding transactions and balances with a related party, Ivy, a controlling shareholder, see Notes 5, 10A and 10B.5(1).

Note 13 - Subsequent events

1. On April 26, 2022, Nayax extended an additional amount of $1,000 of borrowings to the Company, as mentioned in note 1(C).

F-23

 

1.Regarding to completion of the sale of ASEC, including its Mass Transit Ticketing operation on April 21, 2021, see Notes 1C(2) and 8.

2.Regarding of the Company’s rights offering in April 2021, see Note 10B.

 


Item2. 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:

 

the closing of the merger transaction we entered into with Nayax Ltd., or Nayax;

our ability to continue as a going concern and any efforts that we may undertake to support our future operations, service our debt obligations and to further execute our business plans;

any impact of the Corona Virus, or COVID-19, pandemic on our business and cash flow, including timing of receipt of orders and payment from our customers;

 

the impact of general economic, political, demographic and business conditions worldwide, including geopolitical uncertainty and instability, such as the Russia-Ukraine conflict, on general economic conditions and on our business in the short and long terms;

future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers;

 

future costs and expenses and adequacy of capital resources;

 

our expectations regarding our short-term and long-term capital requirements and satisfaction thereof;

 

interest from current and new customers and rate of orders;

the impactglobal shortage in components and the related effects of ongoing litigation on our business;an increase in components’ prices, freight cost and longer lead-times;

 

the results of our pending rights offering;

our outlook for the coming months; and

 

information with respect to any other plans and strategies for our business.

 

The factors discussed herein, and in those risk factors expressed below and from time to time in our press releases or filings with the Securities and Exchange Commission, or the SEC, could cause actual results and developments to be materially different from those expressed in or implied by such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak and are made only as of the date of this filing.

 

2

Our business and operations are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Quarterly Report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described among others under the heading “Risk Factors” below and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 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.

 


Overview

 

We are a leading developer of contactless payment solutions, Near Field Communication (NFC) technology based, for the unattended market. We have been a technology leader since 1990, providing systems, devices and services to operators and integrators with solutions and components that are simple to implement.

 

To date, we have deployed over one million payment solutions to our focused unattended markets: self-service kiosk, micro-markets and vending machines, entertainment and gaming, automated teller machines, Mass Transit Ticketing Validation and fuel payments.

 

We operate through regional offices, supporting clients and payment industry partners with its unique contactless payment solutions.

 

On April 21, 2021,January 10, 2022, we soldfiled a petition, or the Petition, with the Israeli county court of Nazareth, or the Court, seeking protections from our Polish subsidiary, ASEC S.A.,creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after our board of directors, or ASEC, includingthe Board, determined that we are insolvent from a cash flow perspective.

On January 19, 2022, we entered into a binding term sheet, or the Term Sheet, with Nayax. The Term Sheet provides that we and Nayax will enter into a two-step transaction relating to (i) Nayax extending to us a senior secured convertible loan, or the Nayax Loan; and (ii) the purchase by Nayax of 100% of our Mass Transit Ticketing activityshare capital in Poland. The consideration for $4,500,000. Consequently, to the sale of ASEC was agreed to equal $3 million, of which approximately $2.1 million was used to repay Polish bank loans,entry into the Term Sheet, and which was reduced by an agreed amount of approximately $300,000 due to working capital adjustments. Following this sale, we operate in two segments: (1) Retail, and (2) Petroleum.at our request, the Court dismissed the Petition.

 

In addition,On January 27, 2022, we engagedentered into a definitive agreement and debenture relating to the Nayax Loan, or the Nayax Loan. On March 17, 2022, we entered into an investment bankAgreement and Plan of Merger, or the Merger Agreement, with Nayax and OTI Merger Sub Ltd., an Israeli company, wholly owned by Nayax, or Merger Sub, pursuant to explore strategic optionswhich Merger Sub will merge with and are investing resourcesinto our company, with our company surviving as a direct wholly-owned subsidiary of Nayax, or the Merger, in this process.exchange for $4,500,000 in cash, or the Merger Consideration. On May 10, 2022, the shareholders approved the Merger. The Company expects that the Merger will be completed after June 10, 2022, following and subject to the passage of the waiting periods prescribed under the Companies Law, 1999, and the fulfillment of certain closing conditions.

 

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, 20202021 filed with the SEC.

 

Results of Operations

3

 

Discontinued operations. In April 2021, we completed the sale of 100% of the issued and outstanding share capital of ASEC. ASEC is headquartered in Krakow, Poland and had been conducting our Mass Transit Ticketing business in Poland (which was attributed to our “Retail and Mass Transit Ticketing” segment). In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division. Accordingly, the results and the cash flows from such operations for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. All the data in this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those discontinued operations.

 

Three months ended March 31, 2021,2022, compared to the three months ended March 31, 20202021

 

Sources of Revenue

 

We have historically derived a substantial majority of our revenues from the sale of our products, including both complete systems and original equipment manufacturer componentscomponents. Furthermore, we generate revenues from licensing and transaction fees, and also less significantly, from engineering services, customer services and technical support. support. In addition, we have derived revenues from Software as a Service, or SaaS. During the three months ended March 31, 20212022 and March 31, 2020,2021, the revenues that we derived from those sources are presented in two separate line items, as follows (in thousands):

  

Three months ended
March 31,

 
  2021  2020 
Sales $2,387  $3,343 
SaaS $382  $324 
Total revenues $2,769  $3,667 

 


  

Three months ended

March 31,

 
  2022  2021 
Sales $2,465  $2,387 
SaaS $428  $382 
Total revenues $2,893  $2,769 

Sales. Sales. Sales decreasedincreased by $1.0 million,$78,000, or 29%3%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020.2021. The decreaseincrease is mainly attributed to a decreasean increase of Retail segment sales in the Americas a decreaseand an increase in sales of Petroleum products in Africa and the Americas and Africa, partially offset by a decrease of Retail sales in Europe partially offset by an increase in Retail segment sales inand APAC.

 

SaaS.SaaS revenues include monthly payments for a set of different software applications such as Terminal Management Systems, Payment gateway, and other software applications for the Retail segment, and a separate set of applications for fuel management systems supporting the Petroleum segment. Our SaaS revenues increased by $58,000,$46,000, or 18%12%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020.2021. The increase is mainly attributed to an increase in revenues in our Retail segment.

 

We have historically derived revenues from different geographical areas. The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of quarterly revenues in different geographical areas, in the three months ended March 31, 20212022 and March 31, 2020:2021:

 

Three months ended March 31,  Americas  Europe  Africa  APAC 
2021  $873   32% $914   33% $368   13% $614   22%
2020  $1,755   48% $1,182   32% $517   14% $213   6%
Three months ended
March 31,
 Americas  Europe  Africa  APAC 
2022 $1,940   67% $338   12% $429   15% $186   6%
2021 $873   32% $914   33% $368   13% $614   22%

 

Our revenues from sales in Americas decreasedincreased by $882,000,$1.1 million, or 50%122%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, mainly due to a decreasean increase in sales of readers to the U.S. market.market and sales of Petroleum products.

 

Our revenues from sales in Europe decreased by $268,000,$576,000, or 23%63%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, mainly due to a decrease in Retail sales.sales in the Russian market.

 

4

Our revenues from sales in Africa decreasedincreased by $149,000,$61,000, or 29%17%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, mainly due to a decreasean increase in sales of Petroleum products.

 

Our revenues from sales in the Asia-Pacific region, or APAC, increaseddecreased by $401,000,$428,000, or 188%70%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, mainly due to an increasea decrease in Retail sales.

 

Our revenues derived from outside the United States are primarily receivedtransacted 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.

 

Due to the conflict between Russia and Ukraine, and in light of sanctions imposed by certain countries on Russia, our Board guided our management to halt sales to Russian customers. As a result, our revenues will continue to be adversely impacted.

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 March 31, 20212022 and March 31, 2020:2021:

 

Three months ended March 31, Retail  Petroleum 
2021 $2,282   82% $487   18%
2020 $2,869   78% $798   22%
Three months ended March 31, Retail  Petroleum 
2022 $2,121   73% $772   27%
2021 $2,282   82% $487   18%

 

Our revenues from Retail in the three months ended March 31, 20212022 decreased by $587,000,$161,000, or 20%7%, compared to the three months ended March 31, 2020,2021, mainly attributed to a decrease of sales in the United StatesEurope and a decrease of sales in Europe,APAC, partially offset by an increase in sales in APAC.the Americas.

 

Our revenues in the three months ended March 31, 2021,2022, from Petroleum decreasedincreased by $311,000,$285,000, or 39%59%, compared to the three months ended March 31, 2020,2021, mainly due to a decreasean increase in sales of Petroleum products in Africathe Americas and the Americas.Africa.

 


Cost of Revenues and Gross Margin

 

Our cost of revenues, presented by gross profit and gross margin percentage, for the three months ended March 31, 20212022 and March 31, 2020,2021, were as follows (dollar amounts in thousands):

 

  Three months ended
March 31,
 
Cost of revenues 2021  2020 
Cost of sales $1,366  $2,021 
Gross profit $1,403  $1,646 
Gross margin percentage  51%  45%
Cost of revenues Three months ended
March 31,
 
  2022  2021 
       
Cost of sales $1,543  $1,366 
Gross profit $1,350  $1,403 
Gross margin percentage  47%  51%

 

Cost of sales. 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 $655,000,$177,000, or 32%13%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, resulted primarily from an increase in sales and an increase in the cost of components due to a decrease in sales.global components shortage as a result of the COVID-19 pandemic.

 

Gross margin. The increasedecrease in gross margin percentage in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is mainly attributed to a change in our revenue mix, including an increase of the ratiocost of our SaaS revenues outcomponents due to a global shortage of components as part of the total revenues.impact of the COVID-19 pandemic.

 

5

Operating expenses

 

Our operating expenses for the three months ended March 31, 20212022 and March 31, 2020,2021, were as follows (in thousands):

 

  Three months ended
March 31,
 
Operating expenses 2021  2020 
Research and development $838  $893 
Selling and marketing $605  $698 
General and administrative $746  $802 
Total operating expenses $2,189  $2,393 
Operating expenses Three months ended
March 31,
 
  2022  2021 
Research and development $731  $838 
Selling and marketing $580  $605 
General and administrative $853  $746 
Total operating expenses $2,164  $2,189 

 

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 decrease of $55,000,$107,000, or 6%13%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is primarily attributed to reductions in the salaries and a decrease in subcontracting expenses, partially offset by an increase derived from recruitment of newin expenses relating to employees.

 

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 and professional expensesexpenses. Our selling and participation in exhibitions and tradeshows. The decrease of $93,000, or 13%,marketing, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020, is primarily attributed to a decrease in employment expenses, mainly due to reductions in salaries, and also less significantly decreases in exhibition and traveling expenses as a result of the impact of COVID-19.2021, remained consistent.

 

General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive management and financial and administrative staff. These expenses also include costs of our professional advisors (such as legal and accounting), office expenses and insurance. The decreaseincrease of $56,000,$107,000, or 7%14%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is primarily attributed to a decreasean increase in employmentlegal expenses derived mainly due to reductions infrom the salaries of our management and employees, and also less significantly decreases in traveling expenses as a resultoperation of the impact of COVID-19.Merger with Nayax.

 


Financing (expenses) income, net

 

Our financing (expenses) income, net, for the three months ended March 31, 20212022 and March 31, 2020,2021, were as follows (in thousands):

 

 Three months ended
March 31,
 
  2021  2020 
Loss from change in fair value of embedded derivative $(1,974) $- 
Other financial income, net $4  $176 
Financing (expenses) income, net $(1,970) $176 
  Three months ended
March 31,
 
  2022  2021 
Loss from change in fair value of embedded derivative $-  $(1,974)
Other financial (expenses) income, net $(146) $4 
Financing expenses, net $(146) $(1,970)

 

Financing (expenses) income,expenses, net, consist primarily of financing expense related to interest payable on bank loans, bank commissions and to a change in fair value of embedded derivative in the convertible short-term loan received from shareholders, also referred to as the Convertible Loan below, partially offset by financing income related to interest earned on investments in short-term deposits and foreign exchange differentials. The change in total financing (expenses) income,expenses, net, of $2.1$1.8 million in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is mainly due to a loss from change in the fair value of embedded derivative of $2.0 million in the first quarter of 2021, andpartially offset by financing expense related to a much lesser degree from exchange rate differential.interest payable on the Nayax Loan of $0.1 million.

 

6

Income tax benefit, net

  Three months ended
March 31,
 
  2022  2021 
Income tax benefit, net $-  $13 

The decrease in our income tax benefit, net, of $13,000, in 2022 compared to 2021 is mainly attributed to income tax benefit due to previous years as recognized by our South African subsidiary in 2021.

Net loss from continuing operations

 

Our net loss from continuing operations for the three months ended March 31, 20212022 and March 31, 2020,2021, was as follows (in thousands):

 

  Three months ended
March 31,
 
  2021  2020 
Net loss from continuing operations $(2,743) $(576)
  Three months ended
March 31,
 
  2022  2021 
Net loss from continuing operations $(960) $(2,743)

 

The increasechange in our net loss from continuing operations of $2.2$1.8 million, or 376%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is mainly due to an increasea decrease in our financing expenses, net, due to a loss from change in fair value of embedded derivative and a decrease in our sales,of $2.0 million, partially offset by a decrease in our operating expenses,financing expense related to interest payable on the Nayax Loan of $0.1 million , as described above.

 

Net loss from discontinued operations

 

Our net loss from discontinued operations for the three months ended March 31, 20212022 and March 31, 2020,2021, was as follows (in thousands):

 

  Three months ended
March 31,
 
  2021  2020 
Net loss from discontinued operations $(418) $(93)
  Three months ended
March 31,
 
  2022  2021 
Net loss from discontinued operations $-  $(418)

 

The results from the Mass Transit Ticketing activity and the SmartID activity for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The increasedecrease in the net loss from discontinued operations of $325,000, or 349%,$418,000, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is mainly due to an increasea decrease in loss from the Mass Transit Ticketing operation in the first quarter of 2021 as a result of the impact of COVID-19. We completed the sale of this operation on April 21, 2021.

 


Net loss

 

Our net loss for the three months ended March 31, 20212022 and March 31, 2020,2021, was as follows (in thousands):

 

  Three months ended
March 31,
 
  2021  2020 
Net loss $(3,161) $(669)
  Three months ended
March 31,
 
  2022  2021 
Net loss $(960) $(3,161)

 

The increasedecrease in net loss of $2.5$2.2 million, or 372%, in the three months ended March 31, 2021,2022, compared to the three months ended March 31, 2020,2021, is primarily due to an increasea decrease in our financing expenses, net, derived from loss from change in fair value of embedded derivative in the first quarter of 2021 and a decrease in our sales and an increase in net loss from discontinued operations, partially offset by a decrease in our operating expenses, as described above.

 

7

Liquidity and Capital Resources

 

Our principal sources of liquidity since our inception have been revenues, proceeds from sales of equity securities, borrowings from banks, governments and shareholders, including convertible loans, proceeds from the exercise of options and warrants as well as proceeds from the divestiture of parts of our businesses. As of March 31, 2021,2022, we had cash, cash equivalents and short-term investments representing bank deposits of $1.1approximately $1.75 million. As of March 31, 2022, we also have a payable balance on our short-term bank loan, that is due within the next 12 months of approximately $2.0 million (ofand a convertible short-term loan from Nayax (including accrued interest), of approximately $5.6 million. On January 10, 2022, we filed the Petition with the Court seeking protections from our creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after our Board determined that we are insolvent from a cash flow perspective. However, following the signing of the agreement relating to the Nayax Loan, such Petition was dismissed and all amounts due under the convertible loan from shareholders (including our controlling shareholder) and the Bank Leumi loan, were paid in full. In addition, Nayax has provided us with a full guarantee for a $2.0 million short-term loan provided to us by a bank which bears an amountannual interest rate of $105,000 has been pledged as security for certain items)SOFR plus 2.45%, excluding cashwhich is being rolled over on a monthly basis (i.e., repaid and cash equivalents held for sale.

The recent deterioration in the COVID-19 pandemic situation in Poland led to an almost complete stopre-provided on a monthly basis), and additional guarantees to our Mass Transit Ticketing sales business, which negatively impactedsuppliers and subcontractors to allow us to maintain our cash flow since March 2020. On April 21, 2021, we completed theongoing production and sale of our wholly owned Polish subsidiary, ASEC, including our Mass Transit Ticketing activity.

In December 2020products. On April 26, 2022, Nayax extended an additional amount of $1.0 million to us, which is added to the previous $5.5 million loan and January 2021, we borrowed a loan, orshall be subject to the Convertible Loan, in two tranches aggregating $1.6 million, from Jerry Ivy, Jr. Descendants’ Trust, our controlling shareholder, and another shareholder that, if not converted, would mature on June 17, 2021. The Convertible Loan and accrued interest, may be converted, at the discretion of our controlling shareholder into our ordinary shares at a conversion price of approximately $0.174 if converted on or before June 17, 2021 and $0.124 thereafter.

Our management has taken cost reduction steps, including material reductions in the salaries of our management and employees, and has been working for the past few months on updating our strategy for the coming years in order to realize our potential and resume our growth, and ultimately create shareholder value. We are attempting to raise additional funds and to increase our cash. In April 2021, we commenced a rights offering with an aggregate price of up to $3.3 million (if fully subscribed) and a subscription price per share of $0.174. Our controlling shareholder, has provided a commitment letter pursuant to which it committed to exercise its basic subscription rights as partprovisions of the rights offeringNayax Loan.

In the event where the Merger is not completed, under certain circumstances, we will be required to pay Nayax a termination fee of $1.5 million. Furthermore, non-completion of the merger would be considered an “event of default” under the Nayax Loan, which can result in Nayax’s requirement for an immediate repayment of the Nayax Loan Amount, or an increase of the annual interest on the Nayax Loan Amount from 10% to 16% interest, at Nayax’s sole discretion. We will also be required to repay the bank loan provided with Nayax’s guarantee and its over-subscription privilege for upwould be exposed to approximately $2.8 million in the aggregate, subject, however,a risk of not being able to conduct our business due to the limitation that such holdings, including any of its affiliates, will not exceed 45% or more of our issued and outstanding share capital after conclusionloss of the rights offering. The rights offering expires on May 19, 2021.guarantees provided by Nayax to our suppliers and subcontractors. Based on the commitment letterprojected cash flows and our cash balances as of our controlling shareholder,March 31, 2022, we believe that without: (1) the completion of the Merger and increase of our cash by receiving additional loans from Nayax (at Nayax’s sole discretion) under the terms set under the Nayax Loan; or (2) other increase in our cash, we will not have sufficient capital resources to fundenable us to continue our operations for a period of at least the next 12 months. In addition, we engaged an investment bankmonths from the date of this filing, and may need to explore strategic options and are investing resources in this process.commence insolvency proceedings. As a result, there is substantial doubt regarding our ability to continue as a going concern.

 

In connection with the outbreak of the COVID-19 pandemic, we have taken steps to protect our workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include workworking from home where possible, minimizing face-to-face meetings, and utilizing video conferenceconferencing as much as possible, social distancing at facilities and elimination of allmost international travel. We continue to comply with all local health directives.

So far, the main direct impact of the COVID-19 pandemic was a decrease in our revenues derived from Mass Transit Ticketing activity in the Polish market. The revenues from this operation, that were relatively stable during the year preceding the COVID-19 outbreak, decreased by $295,000 in the first quarter of 2021 compared to the first quarter of 2020, mainly due to the lockdown and other restrictions and consequences of the COVID-19 as started in March 2020. On April 21, 2021, we completed the sale of ASEC, including our Mass Transit Ticketing activity, as mentioned above. The results, including the revenues, and the cash flows of the Mass Transit Ticketing operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. The consideration for the sale of ASEC was agreed to equal $3 million, of which approximately $2.1 million was used to repay Polish bank loans and was reduced by an agreed upon reduction of approximately $300,000 due working capital adjustments. Accordingly, we received net cash of $600,000 from the ASEC sale in April 2021.

 


Another impact of COVID-19 has been on product delivery, where components’ procurement lead time is longer and aThe global shortage in components, has grown aswhich caused an increase in components prices, freight cost and longer lead-time, created a delay in fulfilling customers’ orders, which impacted our revenues and product gross margin, mainly in the durationRetail segment. As a response to this business environment, we encouraged our customers to provide a forecast for their demand. We continue to maintain a comprehensive network of the COVID-19 pandemic has continued.world-wide suppliers in order to optimize our access to critical components. As long as the COVID-19 pandemic continues, and possibly also thereafter, the components’ lead timelead-time may be longer than normal and the shortage in components may continue or get worse. Therefore, we maintain a comprehensive network of world-wide suppliers.

 

We have seen a higher interest from a growing number of potential customers and partners as they forecasted that the need for our products will grow, yet execution of closing is still slow due to the current business environment.

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

 

As of March 31, 2022, our and certain of our subsidiaries’ manufacturing facilities and certain equipment have been pledged as security to Nayax in respect of a Nayax Loan.

8

Operating activities related to continuing operations

 

For the three months ended March 31, 2022, net cash used in continuing operating activities was $2.8 million, primarily due to a $1.0 million net loss from continuing operations, a $2.4 million decrease in trade payables, a $406,000 increase in other receivables and prepaid expenses, a $269,000 decrease in other current liabilities, a $198,000 increase in inventory and a $51,000 change in accrued interest and linkage differences, partially offset by a $1.3 million decrease in trade receivables, $108,000 of transaction expenses related to the convertible short-term loan received, $83,000 of depreciation and amortization, $36,000 of expenses due to stock-based compensation issued to employees and others and a $16,000 change in accrued severance pay.

For the three months ended March 31, 2021, net cash used in continuing operating activities was $1.5 million, primarily due to a $2.7 million net loss from continuing operations, a $764,000 increase in trade receivables, a $169,000 decrease in trade payables, a $169,000 change in accrued interest and linkage differences, $13,000 of deferred tax benefits and a $13,000 change in accrued severance pay, partially offset by a $2.0 million loss from change in fair value of embedded derivative, a $152,000 increase in other current liabilities, a $110,000 decrease in inventory, $100,000 of depreciation and amortization, a $50,000 decrease in other receivables and prepaid expenses, $14,000 of expenses due to stock-based compensation issued to employees and others and $10,000 of transaction expenses related to the convertible short-term loan received from shareholders.

 

Operating activities related to discontinued operations

For the three months ended March 31, 2020,2022, net cash used in continuingprovided by discontinued operating activities was $32,000 primarily due to a $867,000 increase in trade receivables, a $576,000 net loss from continuing operations, a $156,000 change in accrued interest and linkage differences, $11,000 of deferred tax benefits and a $8,000 change in accrued severance pay, partially offset by a $596,000 increase in other current liabilities, a $429,000 increase in trade payables, a $386,000 decrease in inventory, $108,000 of depreciation and amortization, a $55,000 decrease in other receivables and prepaid expenses and a $12,000 of expenses due to stock-based compensation issued to employees and others.

Operating activities$19,000, mainly related to discontinued operationslegal fees.

 

For the three months ended March 31, 2021, net cash provided by discontinued operating activities was $3,000, mainly related to the Mass Transit Ticketing operations that were managed by ASEC.

 

Investing and financing activities related to continuing operations

For the three months ended March 31, 2020,2022, net cash used in discontinued operatingcontinuing investing activities was $1.4 million, mainly related$59,000, due to the Mass Transit Ticketing operations that were managed by ASEC and to expenses derived from legal proceedings with Harel Insurance Company Ltd.$59,000 of purchases of long-lived assets.

 

Investing and financing activities related to continuing operations

For the three months ended March 31, 2021, net cash used in continuing investing activities was $29,000, due to $29,000 of purchases of long-lived assets.

 

For the three months ended March 31, 2020,2022, net cash provided by continuing investingfinancing activities was $1.4$3.7 million, primarily due to a change of $1.5$5.5 million convertible short-term loan from Nayax, and $2.0 million in short-term investments, net,short term bank credit, partially offset by $103,000a $2.1 million repayment of purchasesshort-term bank credit, a $1.8 million repayment of long-lived assets.convertible short-term loan from shareholders and a $8,000 repayment of a long-term loan.

 

For the three months ended March 31, 2021, net cash used in continuing financing activities was $201,000, due to a $1.2 million decrease in short-term bank credit, net and a $2,000 repayment of long-term loans, partially offset by $961,000 of proceeds from convertible short-term loan received from shareholders, net of transaction expenses.

For the three months ended March 31, 2020, net cash provided by continuing financing activities was $306,000, mainly due to $200,000 of proceeds from issuance of shares, net of issuance costs, and a $111,000 increase in short-term bank credit, net, partially offset by a $5,000 repayment of long-term loans.

 


9

Investing and financing activities related to discontinued operations

 

We had no cash flows provided by or used in discontinued investing activities in the three months ended March 31, 2022.

For the three months ended March 31, 2021, net cash provided by discontinued investing activities was $2.1 million mainly related to the proceeds from the sale of ASEC that were received prior to the closing to repay certain debt in Poland.

 

For the three months ended March 31, 2020, net cash used in discontinued investing activities was $66,000, mainly related to the purchase of long-lived assets for the Mass Transit Ticketing operations.

We had no cash flows provided by or used in discontinued financing activities in the three months ended March 31, 2021.

For the three months ended2022 or March 31, 2020, net cash provided by discontinued financing activities was $49,000, mainly related to an increase in short-term bank credit, net, for the Mass Transit Ticketing operations.2021.

 

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures - Our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was made known to our management, including our CEO and CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of March 31, 2021.2022. 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 March 31, 20212022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 


10

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

 

For information with respect to legal proceedings to be disclosed under this Item, see Note 6A to the consolidated Financial Statements included under Part I Item 1 in this Quarterly Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.6. Exhibits.

 

In December 2020 and January 2021, we borrowed a loan, in two tranches aggregating $1.6 million, from our controlling shareholder, and another shareholder that would mature on June 17, 2021. On March 2, 2021, our shareholders approved, as required under Israeli law, that such loan may be converted. Accordingly, such loan and accrued interest, may be converted, at the discretion of our controlling shareholder into our ordinary shares at a conversion price of approximately $0.174 if converted on or before June 17, 2021 and $0.124 thereafter. We extended the loan, assuming it may be converted, pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

Item6. Exhibits.

3.1 

Amended and Restated Articles of Incorporation as amended on April 14, 2020 (incorporated by reference to the Company’s reportproxy statement on Form 10-QSchedule 14A filed with the SEC on May 12, 2020)October 28, 2021).

   
3.2 

Memorandum of Association, as amended and restated after the April 14, 2020December 2, 2021 amendment (incorporated by reference to the Company’s reportAnnual Report on Form 10-Q10-K filed with the SEC on May 12, 2020)April 13, 2022, as amended on April 15, 2022).

   

31.1*

 Rule 13a-14(a) Certification of Chief Executive Officer.
   
31.2* Rule 13a-14(a) Certification of Chief Financial Officer.
   
32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
   
32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
   
101 * 

The following materials from our Quarterly Report on Form 10-Q for the quarter ended March 31, 20212022 formatted in inline XBRL (eXtensible(inline eXtensible Business Reporting Language): (i) the Interim Condensed Consolidated Balance Sheets, (ii) the Interim Condensed Consolidated Statements of Operations, (iii) the Interim Condensed Consolidated Statements of Comprehensive Loss, (iv) the Interim Condensed Statements of Changes in Equity, (v) the Interim Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Interim Condensed Consolidated Financial Statements, tagged as blocks of text and in detail.

104 *Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*Filed herewith.

**Furnished herewith.

 


SIGNATURES11

 

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ON TRACK INNOVATIONS LTD.

By:/s/ Amir Eilam 
 
By:/s/ Yehuda HoltzmanAmir Eilam, Chief Executive Officer 
Yehuda Holtzman, Chief Executive Officer
(Principal Executive Officer)
Dated: May 13, 2021 
   
By:/s/ Assaf CohenDated: May 23, 2022 
By:/s/ Assaf Cohen
Assaf Cohen, Chief Financial Officer 
(Principal Financial and Accounting Officer) 
Dated: May 13, 202123, 2022 

 

12

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